What happened

Shares of United States Steel Corporation (NYSE:X) are down 13.4% at 1:40 p.m. EDT on April 27, following the company's first-quarter earnings release and call after market hours on April 26. The steelmaker reported GAAP earnings of $0.10 per share, and adjusted net earnings of $0.32 per share, ahead of Wall Street analyst estimates of $0.29 per share. This was substantially better than last year's Q1 result, which included a net loss of $180 million, or $1.03 per share.

So why the big drop? In short, because the market is looking ahead. U.S. Steel management said the company is "experiencing operational challenges" at its Great Lakes Works facility, and this would take a $30 million bite out of its second-quarter EBITDA (earnings before interest, taxes, depreciation, and amortization). The earnings guidance also described "the possibility of continued operational volatility for assets yet to be revitalized," as the company is in the midst of a multiyear capital improvement effort.

Hot rolled steel in a steelmaking facility

Image source: Getty Images.

So what

The company's guidance calls for $400 million in adjusted EBITDA in the second quarter, and $1.5 billion to $1.7 billion for the full year; some industry followers are already saying the second-quarter math doesn't jibe with the recent increases in steel prices. It seems that some investors have been spooked out of U.S. Steel stock on fears that its capital improvements aren't generating the kinds of returns they were expecting, and concerns that the company is struggling to revitalize its outdated and inefficient facilities.

Now what

Since peaking in mid-February following the announcement that the Trump administration would implement broad tariffs on steel imports, shares of U.S. Steel have fallen 25%. This is a stark reminder that it's going to take more than just higher steel prices for the company to turn into a winner. It still spends a significant portion of its cash flow on debt coverage, and its asset base is in dire need of modernization.

The good news is that management is working hard to address these issues. Debt has been reduced by 23% over the past three years, its cash balance has increased by 28%, and the company has been able to refinance other debt to later maturities. At the same time, the company is spending heavily to modernize its asset base over the next three years.

With that said, I don't think now is the time to invest in U.S. Steel. The company has a long way to go to get its balance sheet and asset base in order, and the risk of a steel downturn derailing the company's cash flow -- and ability to continue investing in capital improvements -- is too great to make the potential upside worth it. Given a little more time to generate proof that the turnaround is indeed happening, U.S. Steel might become investment-worthy. But we aren't there yet.