"UBS is out very negative on US Steel (NYSE:X) lowering their tgt to $23 from $25 after their 2009 EPS estimate for X drops to a $0.55 loss from breakeven EPS, now incorporating weaker tubular results, plus company guidance for pension/OPEB and capex costs. Drilling permits and rig counts suggest sharply worse tubular prices and volume, retreating from record Q4. This compares with consensus ’09 EPS at $1.43. UBS foresees H1 losses, with a turnaround in Europe after destocking potentially supporting H2.
Volume recovery is key, but challenging in global recession
The company reiterated that better volume is key to earnings recovery, highlighting the importance of economies of scale. Firm anticipates below 60% utilization in ’09 from the U.S. sheet business, as mini-mills restart to 80%, for a US average ~70%. Distributor shipments down ~40% in Q1 suggest potential downside to volumes.
Debt costs likely rise,
UBS anticipates in Q409 U.S. Steel will trip the total debt-to-EBITDA covenant on its $750M revolver of 3.25x, registering 4.5x. UBS credit analyst Jeff Cramer also believes its credit ratings could be lowered. Currently Moody’s has X as investment grade, at Baa3, while S&P’s BB+ rating is junk. While debt maturities look manageable near term, they anticipate funding costs will rise." |
