United States Steel Corporation (X) stock was arc furnace hot on Friday, shooting up more than 17 percent after the company released strong first-quarter earnings that surprised the Street.
The company reported earnings of 31 cents a share, far better than estimates of 17 cents that analysts had expected. Quarterly revenue of $3.5 billion also beat estimates of $3.25 billion.
Sell-side analysts, however, weren’t as excited, saying the company’s shares will face headwinds from lower steel prices and a period of major revitalization, including a $1 billion upgrade at Pennsylvania's Mon Valley Works.
The Analysis
First-quarter strength was mainly due to better flat-rolled prices and “relatively resilient pricing” overall. But overhauling is going to take a near-term toll, according to BMO’s David Gagliano.
“While US Steel's ongoing asset revitalization program should position the company meaningfully better in 2021 and beyond, we maintain our view the shares will be hard pressed to outperform the steel peers on a sustainable basis during this extended transition period,” Gagliano wrote in a note.
Gagliano maintained a Market Perform rating with a price target of $23.
Credit Suisse analyst Curt Woodworth said U.S. Steel “is facing clear challenges in its business model,” given the roughly $1.4 billion it will spend on Mon Valley and a new electric arc furnace at its Fairfield, Alabama, plant.
Woodworth was more bearish on the long-term effect of the spend.
“The question is, will X ever get an adequate ROI from this spend given its history of unplanned outages, loss of share in automotive, and unexpected reinvestment spends?" Woodworth wrote in a note.
Woodworth kept an Underperform rating with a target price of $11.
Price Action
U.S. Steel shares were up 16.7 percent to $16.82 Friday afternoon.
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