Some Thoughts on US Steel's 4th Quarter Earnings
Last week, I purchased stock in U.S. Steel (X) at $28.50. My reasoning on this can partially be found in my CAPS pitch. Today, X announced 4th Quarter earnings with a huge positive surprise. They reported diluted earnings per share (DEPS) of $2.65. They beat estimates by over $1.20 per share. My own calculation also show Operation Cash Flows (CFOs) of $327 million (2.81 per share) and Free Cash Flows of $64 million ($0.55 per share).
Despite this, I find myself a bit worried about one aspect of their recent release: the balance sheet. I tend to keep a close eye on assets, liabilities, and stockholders equity (SE). I noticed that SE dropped from $6.18 billion on their 3rd Quarter balance sheet (or $52 per share) down to $4.9 billion on their most recent balance sheet (or $42.35 per share). That seems like quite a precipitous drop, especially after a profitable quarter with positive CFOs.
This drop seems to be explained largely by two line items:
(1) Accounts receivables decreases by about $1 billion. This is not all that surprising given the downturn in the steel industry and should also be reflected in X's cash flows.
(2) Employee benefits increases by $1.2 billion to $4.8 billion.
Also, it's worth noting that X's Goodwill actually increased by about $150 million so if you like to discount a company's assets based on Goodwill, that means Shareholders' Equity is even lower than the reported figure.
Of my two causes, the latter is more perplexing to me. It is mentioned in the earnings announcement that X needs to increase pension expense by about $100 million due to 2008 asset performance (not surprising given the destruction of equities around the globe!). X also mentions that their pension is underfunded by $2 billion on an accounting basis and other benefit plans were underfunded by about $3.1 billion.
Now, I have a lot of questions on this. Does the "employee benefit" liability basically include all of these underfunded accounts? Is it typical that these sorts of underfunded liabilities increase during market downturns? Does that mean that they go downwards during periods when the market is going upwards?
I still like US Steel (X) long-term, but it's amazing to me how dramatically accounts can shift from one financial statement to another. Theoretically, you'd expect X's equity account to increase after a highly profitable quarter with positive FCFs, but apparently, pension liabilities have bit them hard.
US Steel can still be a good buy (IMO) under $35, but I do find myself admittedly somewhat concerned over this amazing drop in equity. It reminds you just how fleeting and malleable accounts can be under our accounting standards.