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Analyst Blog

On Nov 8, we reiterated our Neutral recommendation on AK Steel Holding Corporation (AKS - Analyst Report). While the company should gain from healthy automotive demand and its strategic raw material investments, we maintain a cautious stance considering the weak steel pricing environment and a challenging operating backdrop in overseas markets.
 
Why Held?
 
The steel maker posted narrower third-quarter 2013 loss on Oct 22. Adjusted loss per share was lower than the Zacks Consensus Estimate. However, sales fell due to lower shipments and missed the Zacks Consensus Estimate. The company expects results to improve sequentially in the fourth quarter.
 
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 is expected to continue to gain automotive market share, driven by continued healthy demand for its carbon and specialty steel products. 
 
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. 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 lingering crisis in Europe. It is also contending with oversupply in the industry and pricing pressure. Electrical steel prices remain under pressure in overseas markets given the challenging operating environment.
 
A weak European economy and slowing growth in Asia are impacting AK Steel’s electrical steel business. While construction and housing sectors have shown signs of revival of late, they are still not out of the woods. Moreover, maintenance outage costs associated with the Middletown Works blast furnace will continue to weigh on AK Steel’s bottom line in the fourth quarter, albeit to a lesser extent than what witnessed in the third.
 
Other Stocks to Consider
 
Other steel producers with favorable Zacks Rank are Companhia Siderurgica Nacional (SID - Analyst Report), Shiloh Industries Inc. and Unites States Steel Corp. (X - Analyst Report). While both Companhia Siderurgica and Shiloh Industries hold a Zacks Rank #1 (Strong Buy), United States Steel carries a Zacks Rank #2 (Buy).

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