The Hero Of US Steel's Q3 Beat? An Accounting Change

United States Steel Corporation X stock is soaring Wednesday after the company reported a big third-quarter earnings beat Tuesday. But while U.S. Steel investors are cheering the company’s big numbers, Axiom analyst Gordon Johnson is throwing some cold water on the hot quarter.

According to Johnson, an accounting change that altered the way U.S. Steel values its assets was responsible for much of the earnings upside on the quarter.

“In effect, they gave them themselves another $100mn buffer in July associated with an accounting change, but did not increase [emphasis omitted] their full-year guidance by $100mn; stated differently, theoretically, they cut guidance versus expectations in the middle of the year, but did not communicate this, in our view, to investors,” Johnson wrote Wednesday.

“While the market seems to love this change at present (X’s stock is up 16%), we believe, given not one analyst posed this question on the call, this is relatively unknown at present (we were made aware of it by one of our contacts that work within the industry this morning).”

The impact of the accounting changes already seems to be sinking in with investors. U.S. Steel stock initially has pared much of its initial gain throughout Wednesday’s session.

Johnson estimates that the accounting change will be boosting 2017 EBITDA for U.S. Steel by at least $205 million.

Earlier this month, Johnson said the fundamentals of the domestic steel industry are lackluster at the moment and that “demand is weak, iron ore is down, scrap is down and falling and inventories are high based on winter demand.”

Following Wednesday’s move, U.S. Steel stock is down 18.2 percent in 2017.

At publication, U.S. Steel was up 6.95 percent at $27.08.

Related Link: US Steel Investors May Be In For A Reality Check