We have retained our Neutral recommendation on AK Steel Holding Corporation (AKS). We remain cautious factoring in the challenging operating backdrop in overseas markets, softness in the construction market and the weak steel pricing environment.
The steel maker slipped to a bigger loss in fourth-quarter 2012, hit by hefty pension and tax charges, along with weak pricing. Adjusted loss per share, however, beat the Zacks Consensus Estimate. Weak steel demand and pricing hurt sales in the quarter.
AK Steel is expected to benefit from strength in the automotive market and higher shipment of steel products to automakers. The company increased its automotive business by around 20% last year. It expects to continue to gain market share in 2013.
The company is also investing to procure about half of its iron ore and coal requirements internally. It is making good progress with its coal mine plan and expects to begin mining activities in the first half of 2013. It is also making significant progress with its iron ore pellet project at Magnetation. Both these strategic investments are expected to improve the company’s cost structure and strengthen its position in the years ahead.
Moreover, AK Steel should benefit from the favorable pricing trend for key raw materials such as iron ore, coke and coal. Declining prices for these inputs should acts in its favor.
However, AK Steel is contending with weak steel demand, oversupply in the industry and pricing pressure. Weak economic conditions affected demand and steel pricing in the fourth quarter.
AK Steel is also hamstrung by weak construction and housing sectors. Moreover, it is exposed to macroeconomic uncertainties, stemming from the recessionary conditions in Europe and sluggish growth in Asia. AK Steel also has significant pension fund requirements.
AK Steel currently carries a short-term (1 to 3 months) Zacks Rank #3 (Hold).
Other Stocks to Consider
Other companies in the steel industry worth considering are Gibraltar Industries Inc. (ROCK), Commercial Metals Company (CMC) and POSCO (PKX). All of them hold a Zacks Rank #2 (Buy).
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