We are reaffirming our Neutral recommendation on AK Steel Holding Corporation (AKS). While the company is poised to gain from healthy automotive demand and its strategic raw material investments, we remain on the sidelines factoring in the weak steel pricing environment and a challenging operating backdrop in overseas markets.
The steel maker recorded narrower loss in second-quarter 2013, reported on Jul 23. Loss per share was lower than the Zacks Consensus Estimate. However, sales fell due to lower shipments to carbon spot and electrical steel markets and missed the Zacks Consensus Estimate.
AK Steel, a Zacks Rank #3 (Hold) stock, is expected to benefit from strength in the automotive market and higher shipment of steel products to automakers. It expects to continue to gain automotive market share in 2013, driven by continued healthy demand for its carbon and specialty steel products. Automotive represented 50% of the company’s revenues in first-half 2013 and is trending higher than 45% achieved in 2012.
AK Steel 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 near future. 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.
However, AK Steel is exposed to macroeconomic uncertainties, stemming from the sovereign debt crisis in Europe. It is contending with oversupply in the industry and pricing pressure. Lower spot market prices for carbon steel products are hurting selling prices.
In addition, a weak European economy and slowing growth in Asia are impacting AK Steel’s electrical steel business. Moreover, maintenance outage costs associated with the Middletown Works blast furnace will continue to weigh on the company’s bottom line in third-quarter 2013.
Other Stocks to Consider
Other steel producers with favorable Zacks Rank are Nippon Steel & Sumitomo Metal Corporation (NSSMY), Ternium S.A. (TX) and Kobe Steel Ltd. (KBSTY). While both Nippon Steel and Ternium maintain a Zacks Rank #1 (Strong Buy), Kobe Steel holds a Zacks Rank #2 (Buy).
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