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AK Steel (AKS) Poised on Automotive Expansion Amid Headwinds

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On Aug 11, we issued an updated research report on steel maker, AK Steel .

AK Steel topped earnings and sales estimates in second-quarter 2017. Its earnings of 19 cents per share surpassed the Zacks Consensus Estimate of 13 cents. Revenues of $1,557.2 million for the quarter also came ahead of the Zacks Consensus Estimate of $1,530 million.

AK Steel said that its second-quarter performance reflects continued benefits obtained through strategic initiatives implemented over the past one-and-a-half year. The company expects shipments in the third quarter to be relatively flat compared to the second.

AK Steel remains focused on expanding its core automotive business. The company gets a large chunk of its sales from the automotive sector. It is looking to continue to grow its automotive business in 2017.

AK Steel is laying importance on de-emphasizing commoditized products and launching new value-added products. As part of this strategy, the company, last year, launched Nexmet – an innovative product range of high-strength steel for use in automotive lightweighting applications. The products are expected to greatly benefit automotive manufacturers and reinstate the company’s focus on innovation and technology for product development.

Moreover, the recently completed acquisition of Precision Partners Holding Company is in sync with AK Steel's commitment to broaden its portfolio of high-value products and processes and also advances the company’s focus on the rapidly growing automotive lightweighting industry and its position in advanced high strength steels. It also reinforces collaboration with the company’s automotive market customers.

The company also remains committed to reduce cost. It is looking for cost saving opportunities in 2017 through a number of means including process improvement and reduction in process time and procurement activities.

However, AK Steel has underperformed the industry it belongs to over a year. The company's shares have lost 4.1% during the period while the industry saw a gain of about 21.8%.


AK Steel remains exposed to weakness in electrical steel pricing in the overseas markets. Prices remain depressed in the international markets due to global overcapacity. The company expects the global electrical steel market to remain volatile in the near future due to production overcapacity.

AK Steel also expects its average selling price in the third quarter to be modestly lower than the second. Some additional headwinds are expected to come from spending associated with planned maintenance outages in second-half 2017. The company is also exposed to volatility in raw material prices.

The U.S. steel industry is also not out of the woods yet. The American steel industry continues to be hit by cheaper imports, notwithstanding the recent trade actions. According to the American Iron and Steel Institute (“AISI”), total and finished steel imports increased 21.7% and 16.5% year over year, respectively, for the first seven months of 2017. AK Steel also witnessed an increase in grain-oriented electrical steel imports into the U.S. market, especially from China, Korea and Japan, in the first five months of 2017.

AK Steel currently holds a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the basic materials space are POSCO (PKX - Free Report) , The Chemours Company (CC - Free Report) and Kronos Worldwide Inc (KRO - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

POSCO has expected long-term earnings growth rate of 5%.

Chemours has expected long-term earnings growth rate of 15.5%.

Kronos Worldwide has expected long-term earnings growth rate of 5%.

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