Will U.S. Steel (X) Surprise This Earnings Season?

U.S. Steel (X) is set to release its second-quarter 2014 results after the close on Jul 29.

In the last quarter, the steel maker delivered a roughly 8% negative earnings surprise. The company, however, swung to a profit in the quarter as it benefited from its cost improvement actions and higher pricing that offset headwinds from harsh weather. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

U.S. Steel, which has been removed from the S&P 500 effective Jul 1, expects lower income from operations in the second quarter. The company is expected to face raw material delivery issues and operational challenges in the quarter.

Production is expected to be limited and the supply of raw materials and finished products will be less in the quarter due to temporarily slow shipments, mainly resulting from continued weather-related logistical issues.

Bad weather-related logistic bottlenecks are expected to affect production and shipments in the June quarter, leading to a loss in the Flat-rolled segment. The company’s European division is also expected to see weaker results in the quarter.

However, results in the Tubular segment are expected to improve sequentially in the second quarter. Shipments have been projected to be higher due to increased drilling activity.

While U.S. Steel continues to contend with challenging steel market fundamentals, it should gain from increased cokemaking capabilities and healthy automotive demand. The company’s efforts to improve its cost structure through its “Carnegie Way” initiative should continue to provide support to its earnings. These actions are expected to deliver $290 million (up from $150 million expected earlier) in cost and margin improvements this year.

Earnings Whispers

Our proven model does not conclusively show that U.S. Steel is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: ESP for U.S. Steel is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at a loss of 32 cents.

Zacks Rank #3 (Hold): U.S. Steel’s Zacks Rank #3 when combined with an ESP of 0.00% makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other stocks in the basic materials sector you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Thompson Creek Metals Company Inc. (TC) has earnings ESP of +7.69% and retains a Zacks Rank #2 (Buy).

Cameco Corporation (CCJ) has earnings ESP of +21.43% and sports a Zacks Rank #3 (Hold).

Century Aluminum Co. (CENX) has earnings ESP of +5.88% and retains a Zacks Rank #3 (Hold).