Morgan Stanley said it's 'struggling to understand' US Steel's results

Shares of US Steel are getting obliterated Wednesday, losing a quarter of their value after whiffing on earnings and delivering disappointing guidance.

US Steel declared a $US0.83 per share loss that was far below analysts’ expectations for positive earnings of $US0.35 per share. Additionally, the company missed on revenues, generating $US2.73 billion versus expectations of $US2.95 billion.

The enormous miss has some on Wall Street dumbfounded. Morgan Stanley analyst Evan L. Kurtz said in a note to clients after the April 26 earnings statement that he had two major questions for the company.

First, full year earnings guidance was cut by management from $US1.3 billion to $US1.1 billion. Kurtz said that does not totally make sense. He wrote:

“An accounting change moved $US175 mn from opex to capex, so the cut was closer to $US375 mn. Furthermore, HRC is about $US15/t higher from last quarter and tubular has improved, both of which should have moved guidance higher. So in essence, the guidance cut was more than $US400 mn.”

Kurtz said that US Steel attributed the guidance cut to its “asset revitalization plan,” but with capital expenditures only expected to be up $US150 million, the analyst said he can’t make sense of the guidance cut and needs more clarity from management.

In addition, Kurtz said he is “struggling to understand how costs moved up so much.”

US Steel showed in its earnings presentation a $US95 million drag on earnings from costs excluding raw materials. After adjusting for various accounting maneuvers, the drag would equal about $US140 million, according to Kurtz. However, he added that he would be surprised if all of the various headwinds he could think of would add up to this figure.

For now, Morgan Stanley, is keeping its “Overweight” rating and $US48 price target on the stock. However, Kurtz said said he has a lot of questions for management when it hosts a call on April 26.

Click here for a real-time US Steel chart.

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