E U.S. Steel Section 232 Concerns Overdone, Stick With Fundamentals

Steel companies are getting smacked a bit today following a not regarding American steel companies. Credit Suisse has come out with cautious comments about American steel companies and Section 232 tariffs. U.S. Steel (X ) has been hit hard, down over 2% at the time of this writing. What is going on?

Section 232 a positive?

In general, the market consensus is that Section 232 will be a positive catalyst for domestic steelmakers. However upon looking into the Credit Suisse note we find that it cautions that the situation surrounding Section 232 likely will prove far more complex. This is primarily because other countries likely will retaliate and export markets could become logjammed with steel, thus the 232 outcome might not be good in the medium term. However, that is speculation at this time. Quad 7 Capital remains bullish on the stock thanks to strong performance.

Fourth quarter strong

When the company reported its Fourth quarter 2017, we saw a very strong result. The company reported net earnings were $159 million, or $0.90 per diluted share.  When we make some adjustments impacting comparability and accounting for new tax law changes, we find that adjusted net earnings for the fourth quarter 2017 were $136 million, or $0.76 per diluted share.

To demonstrate the turnaround, just look at last year. The present results compare to a fourth-quarter 2016 net loss of $105 million, or $0.61 per diluted share. Fourth quarter 2016 adjusted net earnings were $47 million, or $0.27 per diluted share.

Full-year very strong

In addition to strong fourth quarter performance, the company also reported full-year 2017 net earnings of $387 million, or $2.19 per diluted share.  Once again, after factoring incomparability issues, adjusted net earnings were $341 million, or $1.94 per diluted share. This compares to a full-year 2016 net loss of $440 million, or $2.81 per diluted share. Adjusted net loss for 2016 was $250 million, or $1.60 per diluted share. This is a substantial improvement of $0.34 or 21.2%.