AK Steel (AKS) Poised on Strategic Actions Amid Headwinds
On Mar 23, we issued an updated research report on steel maker AK Steel AKS.
AK Steel topped earnings estimates in fourth-quarter 2016, helped by its cost-reduction actions. The company's adjusted earnings of 25 cents per share for the quarter topped the Zacks Consensus Estimate of 7 cents.
However, sales fell roughly 8% year over year to $1,418.6 million on lower shipments and missed the Zacks Consensus Estimate of $1,434 million. Shipments for the quarter were down around 15% year over year to 1,412,200 tons, affected by the company's move to reduce commodity steel sales to the distributor and converters market and slightly lower shipments to the automotive industry.
AK Steel expects shipments for first-quarter 2017 to be modestly higher on a sequential comparison basis as a seasonal pick-up in automotive shipments is expected to be partly offset by lower shipments to the electrical steel market.
AK Steel Holding Corporation Price and Consensus
AK Steel Holding Corporation Price and Consensus | AK Steel Holding Corporation Quote
AK Steel is well placed to gain from strength in the automotive market. The company gets a large chunk of its sales from the automotive sector. Healthy demand for the company’s carbon and stainless steel products from its automotive customers is expected to continue moving ahead. The company is looking to continue to grow its core automotive business in 2017.
AK Steel also remains committed to reduce cost amid a still challenging operating environment. Its cost reduction initiatives are lending support to its bottom line as witnessed in the fourth quarter. The company saw a roughly 9% decline in its total operating costs in the quarter. AK Steel is looking for cost saving opportunities in 2017 through a number of means including process improvement, headcount cuts, reduction in process time and procurement activities.
AK Steel is also laying importance on de-emphasizing commoditized products and launching new value-added products. The company, last year, launched Nexmet, an innovative product range of high-strength steel for use in automotive lightweighting applications. The products are expected to greatly benefit automotive manufacturers and reinstate the company’s focus on innovation and technology for product development.
However, the company continues to face a challenging macroeconomic environment and weakness in the electrical steel market. The company expects the electrical steel market to remain volatile in the near future due to production overcapacity in China. It sees reduced shipments in this market in first-quarter 2017.
AK Steel is also exposed to volatility in raw material and steel pricing. The company is expected to face some input cost pressure in the first quarter. It sees a last-in-first-out (LIFO) expense of around $25 million for the first quarter, partly due to an expected rise in raw material costs. AK Steel also expects its average selling price to be flat on a sequential comparison basis in the first quarter of 2017. It also expects only a modest increase in selling prices on a year over year basis.
AK Steel also expects higher planned maintenance average costs of round $8 million in the first quarter, compared with $3 million a year ago. For full-year 2017, it sees outage costs to be roughly $90 million versus around $62 million in 2016. All these factors may impact its profitability.
AK Steel has also underperformed the Zacks categorized Steel-Producers industry over the last three months. The company's shares lost 29.9% during the period while the industry saw a gain of about 6.5%.
AK Steel currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked companies in the steel space include United States Steel Corporation X, Ternium S.A. TX and Angang Steel Company Limited ANGGY, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
U.S. Steel has an expected long-term EPS growth rate of 8%.
Ternium has an expected long-term EPS growth rate of roughly 18.4%.
Angang Steel has an expected earnings growth rate of 45.3% for the current year.
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