AK Steel's 2Q Guidance Disappoints

AK Steel Holding Corporation (AKS - Analyst Report) had posted a loss for the second consecutive time in the first quarter of 2012 as lower shipments eclipsed the positive impact of improved prices. However, the company said that it expected shipments to rebound in the second quarter and get back into profitable territory. The probability of a profitable quarter was reaffirmed by AK Steel when it announced its guidance for the second quarter.

The company expects to clock 1,350,000 tons in shipments in the second quarter, slightly ahead of the 1,325,900 tons it shipped in the first quarter. However, as prices are expected to remain consistent with the first quarter, AK Steel’s margins would not have the support of better pricing like last time. But better operating rates and lower raw material costs are expected to earn the company 4–6 cents per share in the second quarter.

Beyond the Headlines

Even though the second quarter would mark AK Steel’s return to profitability after two successive quarters of losses, the projected earnings are below last year’s 32 cents per share and the Zacks Consensus Estimate of 11 cents.

This particular statistic did not go down well with investors, as the stock lost around 3.4% of its value right after the guidance was announced. However, the expected profit also includes the impact of a valuation allowance for its deferred tax assets, the exact measure of which was not quantified by AK Steel.

Problems Galore

AK Steel pointed that macroeconomic uncertainty and deteriorating spot market prices are the key factors which might hinder its performance going forward. As a result, the company was unable to give out a clear guidance as far as its performance is concerned through the rest of the year.

The company’s prospects face greater challenges from increasing imports in the domestic markets along with oversupply in the industry due to ramp up of operations by other steelmakers and Chinese players. These factors seem potent enough to constrict AK Steel’s margins in the long-term.

Strategic Update

The company also provided a lowdown on the progress of its strategic investments. AK Steel’s Magnetation LLC joint venture is expected to produce iron ore pellets before 2015. Similarly, the company believes that it will produce coal through its wholly owned subsidiary AK Coal Resources Inc., before the estimated deadline.

Our Recommendation

We currently have a long-term Neutral recommendation on AK Steel. The company, which competes with Nucor Corporation (NUE - Analyst Report), U.S. Steel Corp. (X - Analyst Report) and Steel Dynamics Inc. (STLD - Snapshot Report), holds a short-term Zacks #3 Rank (Hold).