Investors slashed 27 percent off of the market value of U.S. Steel Wednesday after the Pittsburgh steelmaker limped in with a surprising first quarter loss and announced plans to spend more than $1 billion to upgrade plants in the Mon Valley and elsewhere.
While analysts welcomed the investment, they are worried the three- or four-year project will prevent the steelmaker from capitalizing on the strong steel demand that many are expecting based on President Donald Trump’s pledge to support and protect the industry.
Analysts were stunned that U.S. Steel turned in such a dismal performance despite strong demand and higher prices in recent months. They had been expecting a modest profit based on improved industry conditions as well as the hundreds of millions of dollars of savings the steel producer has generated through CEO Mario Longhi’s Carnegie Way efficiency initiative.
One other fact put the quarterly loss in a more disturbing perspective: the optimism that Mr. Trump’s election generated in the cyclical industry.
Axion Capital analyst Gordon Johnson summed up the frustration of investors who had expected U.S. Steel to report the kind of profits its competitors have. In a note to clients, Mr. Johnson wrote that if things are so bad in good times, then the rest of the year “looks set to resemble a ‘Nightmare on Elm Street.’”
U.S. Steel shares finished Wednesday at $22.78, off $8.33.
That leaves the shares less than $2 higher than they were on Nov. 8, when Mr. Trump’s promise to cut taxes and regulations, make massive investments in infrastructure, and protect American workers energized Wall Street. The so-called “Trump bump” lifted U.S. Steel shares to nearly $42 in February.
“This Trump optimism is just ridiculous,” Mr. Johnson said.
CFRA Research analyst Matt Miller said that given how strong industry fundamentals are, U.S. Steel’s $180 million first quarter loss “caught us all off guard.”
“It was a huge surprise,” he said, adding that the magnitude of the stock’s decline Wednesday was not overdone.
When the Pittsburgh company reported the loss after markets closed Tuesday, U.S. Steel said it expected 2017 profits of about $260 million, or $1.50 per share., much lower than the forecast of $535 million, or $3.08 per share, issued in late January based on market conditions at that time.
That was an unpleasant surprise.
“They should have raised their guidance because prices and volumes in the market look better than they did 90 days ago,” said John Tumazos, a Holmdel, N.J.-based analyst.
U.S. Steel blamed the performance in part on operational issues at its mills. Mr. Tumazos believes those issues could be more serious than investors realized.
Mr. Longhi told analysts and investors on a conference call Wednesday morning that U.S. Steel will spend more than $1 billion over the next three or four years to revitalize its mills and that the company is accelerating plans to…