Morgan Stanley Reiterates Overweight on US Steel (X) After Q3 Guidance and Deleveraging Update, Shares Down 12% Since Thursday

September 20, 2021 4:45 AM EDT
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Shares of US Steel (NYSE: X) fell 8% on Friday and are trading a further 4.2% lower in Monday pre-open after the company presented its Q3 guidance and update on deleveraging efforts.

Q3 EBITDA is expected at $2 billion, higher than $1.3 billion for Q2. For instance, Morgan Stanley was expecting a Q3 EBITDA of around $1.5 billion. Moreover, X said it has reduced its debt by approximately $2.7 billion.

“We expect the third quarter to be a quarter of records for U. S. Steel. Supported by strong reliability and quality performance, sustained customer demand, and continued increases in steel selling prices, we expect our Best for All℠ business model to generate record quarterly adjusted EBITDA and EBITDA margins, demonstrating the power of our strategy,” commented U. S. Steel President and Chief Executive Officer David B. Burritt.

“We remain bullish that market fundamentals will support a stronger for longer steel market and we’ve accelerated the pace of deleveraging to clear the path to transitioning to our Best for All future faster. Our best days are ahead.”

The management also announced plans to build a 3.0mtpy EAF mill using $3.0 billion of existing cash and expected free cash flow generation.

Morgan Stanley analyst Carlos de Alba reiterated Overweight and a $35.00 per share price target on the stock following the update released on Thursday.

“We think the addition of EAF capacity in the US may fuel concerns about a potentially oversupplied market with negative implications for steel prices. However, the new EAF announcement gives us greater confidence that X's higher cost idled assets, which have been instrumental to keeping the market tight, will remain offline. Given the ongoing repositioning of the balance sheet, we think this investment is a good allocation of capital compared to investments in old-dated assets; but, it would consume all the free cash flow we currently model from 1Q22 to 2Q24. The new capacity will help balance X's asset portfolio away from higher-fixed cost BFs and add competitive flex capacity in the EAF assets. Finally, on the broader steel market, we think China remains serious in its decarbonization efforts, which we believe is conducive to a higher level for steel prices in the future vs. the last two decades,” de Alba said in a client note.

Shares of US Steel are trading at 2-month lows near the $23.00 handle.

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