We are downgrading our recommendation on AK Steel Holding Corporation (AKS) to Underperform factoring in the challenging steel pricing environment. The company’s first-quarter 2012 net loss of 11 cents per share matched the Zacks Consensus Estimate. Revenues dipped 4.6% year over year to $1,508.7 million, trailing the Zacks Consensus Estimate. Shipments fell 6.8% year over year in the quarter.
While AK Steel is expected to benefit from the strength in the automotive market, we are concerned about its high cost structure, the challenging operating environment in overseas markets, softness in the construction market and weaker international electrical steel prices. Electrical steel prices remain under pressure in overseas markets given the soft operating backdrop.
Recent fall in scrap prices has further put pressure on steel pricing. We expect weak pricing to weigh on the company’s results moving ahead.
AK Steel is hamstrung by weak construction and housing sectors. The company is also exposed to macroeconomic uncertainties, stemming from the sovereign debt crisis in Europe and sluggish growth in Asia. Moreover, AK Steel has significant pension fund requirements.
The company recently divulged its guidance for the second quarter, which fell short of the Street view. It expects to earn 4–6 cents per share in the quarter, well below last year’s earnings of 32 cents. AK Steel noted that the volatile U.S. economy and falling spot market prices may hinder its performance moving ahead.
AK Steel faces challenges from increasing domestic imports along with oversupply in the industry due to ramp up of operations by other steelmakers, which is putting pressure on prices. These factors may constrict the company’s margins in the long term.
AK Steel, which competes with Nucor Corporation (NUE), U.S. Steel Corp. (X) and Steel Dynamics Inc. (STLD), currently holds a short-term Zacks #5 Rank (Strong Sell).
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