Neutral on AK Steel

Zacks

We maintain our Neutral recommendation on AK Steel Holding Corporation (NYSE:AKS - News), a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products.

AK Steel reported fourth-quarter 2011 net loss of $0.26 per share, beating the Zacks Consensus Estimate of a loss of $0.39 per share. Net sales were $1,509.2 million on shipments of 1,409,900 tons versus $1,390.6 million on 1,359,900 tons in the prior-year quarter. Net sales were also above the Zacks Consensus Estimate of $1,481 million.

AK Steel mainly focuses on products with high margins. Carbon, stainless and electrical steel continue to be the company’s strongest product lines. The revival in demand in the U.S. and abroad bode well for the company.

AK Steel continues to experience growth in the average selling price for the company’s products. The company posted an average selling price of $1,070 per ton in the fourth quarter of 2011, approximately 5% higher than $1,022 per ton reported in the fourth quarter of 2010.

However, AK Steel’s cost structure is higher than its peer group driven by greater reliance on external supply of raw materials, such as carbon scrap, purchased slabs, iron ore and purchased coke. Iron ore is the key raw material in steel manufacturing operations. AK Steel pays nearly double for iron ore pellets compared to its integrated competitors, who consume their own pellets.

AK Steel has significant pension fund requirements. Since 2005, the company has made total pension contributions of over $1.2 billion. During 2009 and 2010, AK Steel made pension contributions of $210 million and $110 million, respectively. The company made pension contributions of $170.0 million during the first half of 2011 to satisfy its required annual pension contributions for 2011.

Moreover, AK Steel increased its total pension fund contributions since 2005 to over $1.3 billion. Currently, AK Steel estimates that its required annual pension contributions will average approximately $180 million for fiscal 2012 and $260 million for fiscal 2013.

Due to continued uncertainty and volatility in economic conditions, AK Steel has not provided any outlook for first-quarter 2012 at this time, but intends to provide guidance later. We expect the company’s core operating results to turn profitable by the first quarter of 2012, as higher carbon steel prices will more than offset higher raw material costs and weaker electrical steel prices.

AK Steel is uniquely positioned to focus on products with high margins. Electrical steel continues to be the company’s strongest product line, with demand recovering in the U.S. and abroad, though at a slower rate. AK Steel is operating its plants at above 80% capacity and is well positioned to serve the end markets when the demand rebounds.

However, higher input costs, particularly iron ore, is eroding the company’s margins. Iron ore pricing concerns have led to a negative outlook for steel manufacturers. A K Steel currently retains a Zacks #3 Rank (short-term Hold rating).

Ohio-based AK Steel Holding Corporation is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products. It operates 7 steel-making and finishing plants in Ohio, Pennsylvania, Indiana and Kentucky. The company competes with Nucor Corporation (NYSE:NUE - News), U.S. Steel Corp. (NYSE:X - News) and Steel Dynamics Inc. (NasdaqGS:STLD - News).

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