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AK Steel Reaffirmed at Neutral

AKS X NUE

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We are retaining our Neutral recommendation on AK Steel Holding Corporation (AKS - Analyst Report). The company turned to a loss in third-quarter 2012, hit by lower steel pricing and hefty tax expense.

Adjusted loss per share of 25 cents a share beat the Zacks Consensus Estimate of a loss of 38 cents. Revenues fell nearly 8% year over year to $1,463.5 million on lower pricing and shipments and missed the Zacks Consensus Estimate. The company said that it expects to post bigger loss in the fourth quarter.

AK Steel is expected to benefit from the strength in the automotive market and higher shipment of steel products to automakers. The company envisions shipments of carbon steel products to automakers to surge 20% to 25% year over year in 2012.

The company 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 first half of 2013. 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 and other major players in the steel space such as Nucor Corporation (NUE - Analyst Report) and U.S. Steel Corp. (X - Analyst Report) are contending with weak steel demand, oversupply in the industry and pricing pressure.

AK Steel is also hamstrung by weak construction and housing sectors. Moreover, it is exposed to macroeconomic uncertainties, stemming from the recessionary conditions in Europe and sluggish growth in Asia. AK Steel also has significant pension fund requirements.

AK Steel, in November 2012, announced that it anticipates wider loss in fourth-quarter 2012 as a sizable non-cash tax expense coupled with lower steel pricing is expected to dent its bottom line in the quarter. Moreover, the company expects its average per-ton selling price to slip roughly 5% in the fourth quarter from the third quarter level, partly triggered by lower spot market prices for carbon steel products as a result of weaker global economic conditions and lower raw material surcharges.

AK Steel also noted that lower raw material costs will not fully offset the decline in prices. Nevertheless, the company expects shipments to increase sequentially in the fourth quarter.

Our recommendation on the stock is in agreement with a short-term Zacks #3 Rank (Hold).

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