U.S. Steel: Q1 Was Bad, But Things May Only Get Worse From Here

United States Steel Corporation (NYSE: X)'s surprise loss in the first quarter contributed to the stock's more than 15 percent decline. But according to Gordon Johnson of Axiom Capital Research, the company's outlook and stock price can only get worse moving forward.

In a research report following U.S. Steel's report, the analyst believes the stock could see downside to $14 per share by the end of the year.

The analyst was quick to highlight several guidance changes to support his bearish stance, including:

1. The company's 2017 near earnings guidance was lowered from $535 million to $260 million.
2. 2017 earnings per share guidance was lowered from $3.08 to $1.50 per share.
3. 2017 EBITDA guidance lowered from $1.3 billion to $1.1 billion, which includes a $175 million benefit associated with an accounting change.

The Assumptions Behind Guidance

Johnson pointed out that the company's guidance implies market conditions, spot prices and other factors remain at their current levels — an assumption that may not hold based on recent history.

Specifically, U.S. HRC spot prices were trading at $631/s. ton at the end of January 2017 versus $640/s. ton today. While this is a positive factor for the company and arguably the most important metric, the same can't be said for other price inputs.

Iron ore prices were $83.34/mt as of the end of January versus $66.07/mt today. Again, this is a positive move for the company but cooking coal prices rose from $169.8/t in January to $257.40/t today — a negative for the company.

Also a factor in the company's guidance is customer demand moving forward. The analyst highlighted demand from auto companies and import volumes will be a negative drag while U.S. construction spending and MSCI service center data (shipments and inventories) are a positive. As such, the two incremental positives and two incremental negatives may cancel itself out.

"We believe the next move in US steel fundamentals is lower, NOT higher," the analyst emphasized.

Bottom line, the analyst believes in shorting U.S. Steel's stock given downside to earnings and cash flow moving forward.

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