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U.S. Steel’s Earnings Fell Short. That Isn’t the Real Problem.

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The price of steel coils is dropping.
Ina Fassbender/AFP via Getty Images

United States Steel stock is doing nothing after a bad earnings miss. Investors just don’t appear to care about profits right now: Another factor is dominating their thinking.

The iconic U.S. company reported $3.64 in adjusted per-share earnings and $1.7 billion in earnings before interest, taxes, depreciation, and amortization from $5.6 billion in sales. Wall Street was looking for $4.37 in per-share earnings and $2 billion in Ebitda from $5.4 billion in sales.

It’s a lot less than investors had penciled in, but so far, they have shrugged it off. U.S. Steel stock (ticker: X) was flat in after-hours trading on Thursday. The shares fell 0.1% in regular trading, ahead of earnings. The S&P 500 fell 0.5%. The Dow Jones Industrial Average traded just about flat.

The steelmaker’s starting valuation might have something to do with the muted reaction. U.S. Steel stock was at about $18.65 in after-hours trading. The company earned about $13.50 a share in 2021, so the price/earnings ratio is 1.4 times. The S&P 500 trades for roughly 23 times trailing 12-month earnings.

Earnings aren’t what is moving the stock lately. Investors’ eyes are glued to the current decline in steel prices because it may well mean lower earnings in the future.

Benchmark steel prices are down about 34% over the past three months and about 40% from the postpandemic peak. But if steel prices were to average their 2019 levels in 2022, they would still have another 50% to fall.

That kind of math is creating unease for investors. Coming into Friday trading, U.S. Steel shares had dropped about 20% over the past three months.

U.S. Steel stock is trading at two times estimated 2022 earnings of about $9.28 a share. That isn’t a big multiple, but the problem is that earnings estimates are falling. A few months back, analysts projected about $9.71 a share, so investors have reason to wonder whether $9.28 is the right number for 2022.

This scenario isn’t unique to U.S. Steel. Shares of Cleveland-Cliffs (CLF) trade for 2.7 times estimated 2022 earnings, while Nucor (NUE) and Steel Dynamics (STLD) shares trade for 5.5 and 4.2 times estimated 2022 earnings, respectively.

Investors don’t like to catch a so-called falling knife. In the case of steel companies, that means investors want to wait for steel prices to bottom out before jumping back in.

U.S. Steel management hosts a conference call at 8:30 a.m. Eastern time Friday to discuss results. Investors and analysts will be looking for insight into the direction of steel prices as well as steel demand in the new year.

Write to Al Root at allen.root@dowjones.com

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