On Jun 24, we issued an updated research report on steel maker AK Steel Holding Corporation ( AKS). While the company should gain from strong upward momentum in the automotive market this year, it is expected to face challenges in the second quarter.
AK Steel posted a bigger loss in first-quarter 2014, reported on Apr 22, hurt by blast furnace outages, income tax charges and higher energy costs. The adjusted loss, however, was lower than the Zacks Consensus Estimate. Sales rose modestly but missed expectations.
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. The company gets more than half of its revenues from this market which continues to show strong momentum.
AK Steel’s automotive shipments were at their highest level in seven years in the first quarter. Light vehicle production is expected to rise 4% year over year to 16.8 million units in North America in 2014. The company is expected to continue to gain automotive market share in 2014, driven by continued solid demand for its carbon and stainless steel products from its automotive customers.
AK Steel is also investing to procure about half of its iron ore and coal requirements internally. It is making good progress with its first coal mine at AK Coal and is ramping up mining volumes. AK Steel is also making significant progress with its iron ore pellet project at Magnetation. Production of first pellets is expected by fourth-quarter 2014 with a ramp up to full capacity in 2015. 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 expected to post a loss in the second quarter due to higher costs from the lingering impact of harsh winter weather. It expects to see increased costs in the quarter as extreme weather conditions delayed the start of the 2014 shipping season and impacted the movement of Canadian iron ore.
Moreover, in the second quarter, supply of iron ore to the steel industry was lesser than expected and hence the company cut its production rate in order to be at par with the supply level. Transportation costs for iron ore pellets are expected to be higher in the quarter.
AK Steel also remains exposed to macroeconomic uncertainties. Oversupply in the steel industry and pricing pressure remain as overhangs.
Other Stocks to Consider
Some other stocks worth considering in the steel space include Universal Stainless & Alloy Products Inc. ( USAP), Grupo Simec S.A.B. de C.V. ( SIM) and ThyssenKrupp AG ( TYEKF). While both Universal Stainless and Grupo Simec have a Zacks Rank #1 (Strong Buy), ThyssenKrupp holds a Zacks Rank #2 (Buy).