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U.S. Steel Strong, but Not for Long

The company beats expectations, but slowdowns in housing and autos put a drag on guidance.

The following analysis was published on April 24 on Street Insight and is being republished here as a bonus for readers.

U.S. Steel

(X) - Get United States Steel Corporation Report

reported a solid first quarter, but a slowdown in the U.S. markets, particularly in the housing and auto sectors, could provide some headwinds. The company beat first-quarter estimates but gave guidance well below Street expectations.

Revenue for the quarter increased to $3.75 billion, and earnings increased 6.6% from a year earlier to $273 million or $2.30 per share. Income from operations fell to $349 million from $369 million as flat-rolled and tubular segments fell, but the European segment rose 65%. The Street was expecting $1.85 per share.

U.S. Steel generated strong cash flow in the quarter and ended with a cash balance of $1.55 billion. That was after the company redeemed $49 million of debt, made a voluntary contribution of $35 million to its pension fund and repurchased 305,000 shares for $25 million.

TheStreet Recommends

While the results were quite strong, the Street was overly optimistic about the upcoming quarters. U.S. Steel said it expects second-quarter results to approximate first-quarter results of $2.30 per share. The average Street estimate was for $2.51, and a couple of analysts had estimates over $3. Higher energy costs and weak U.S. sales are not expected to be overcome by the strength in the European market.

The proposed acquisition of

Lone Star Technology


for $2.1 billion would give the company a more diversified product portfolio and exposure to the strong energy markets. The deal is not expected to contribute significantly to the 2007 results.

It may be a few days before the Street comes to grips with U.S. Steel's results and guidance. Steel prices are strong, driven by a couple of sectors and geographic centers. The Street seems to be ignoring the slowdown in the U.S. markets. Europe remains robust but will not carry the company's results. Having said that, U.S. Steel's upcoming results and cash flows should remain solid, if not exactly up to Street expectations.