U.S. Steel Profit Drops, Outlook Weak; Stock Falls

U.S. Steel posted a 35 percent decline in third-quarter profit on Tuesday, worse than Wall Street had expected, and forecast weak fourth-quarter earnings, sending the steelmaker's shares down 6 percent.

The company, which reported a 25 percent profit drop in the second quarter, again cited weaker tubular steel prices as well as declines in European shipments.

The news weighed on other steel company stocks, and the Dow Jones steel index was down 3.7 percent in early trading.

Analysts, however, said that despite the weak third-quarter figures and poor fourth-quarter outlook, they were generally bullish on U.S. Steel's picking up momentum next year.

"We do not believe this result derails the positive outlook for 2008 and beyond," Credit Suisse analyst David Gagliano wrote in a research note.

Analyst Charles Bradford of Bradford Research/Soleil said, "It was very disappointing and the guidance was even worse. Everybody (analysts) had earnings down, but not as bad as they were."

But Bradford said the U.S. side of the company's results looked better than Europe, while underlying demand for tubular steel used in oil and gas pipelines and drilling rigs was actually good.

The current pricing and demand weakness are due to a huge inventory overhang, he said.

Sam Halpert of Van Eck Global, a mutual fund that manages $3.8 billion in assets, noted that U.S. Steel shares rose sharply Friday on takeover rumors.

In morning trading on the New York Stock Exchange, the shares were down $6.81 to $105.69.

Third-quarter net earnings were $269 million, or $2.27 per share, compared with $417 million, or $3.42 per share, a year earlier, the Pittsburgh-based company said.

Excluding one-time items, earnings were $2.50 per share, falling short of analysts' average forecast of $2.63, according to Reuters Estimates.

In July, after reporting lower second-quarter results, Chairman and Chief Executive John Surma had said he expected operating results to improve in the third quarter. In fact, income from operations fell to $360 million $561 million.

Net sales rose to $4.35 billion from $4.11 billion.

The decrease in European operating earnings to $152 million from $219 million was primarily due to lower shipments as a result of outages and higher raw material and unit costs.

Tubular steel profit fell to $74 million from $164 million, due mainly to lower prices and the cost of integrating operations from the Lone Star acquisition.

The company expects earnings to decline in the fourth quarter because of seasonal effects and some scheduled blast furnace outages. Fourth-quarter results for tubular steel are expected to be consistent with third-quarter levels.

The company said it was starting an early retirement program at its U.S. Steel Kosice operation in Slovakia. It said the financial impact would not be known until later this year.