Reaffirming AK Steel at Neutral

We have reiterated our Neutral recommendation on AK Steel Holding Corporation ( AKS - Analyst Report ) . While the company is poised to gain from healthy automotive demand and lower raw material costs, we remain cautious factoring in its high cost structure, weak steel pricing environment and a challenging operating backdrop in overseas markets.

Why Retained?

The steel maker recorded narrower loss in first-quarter 2013, reported on Apr 23, helped by lower raw material costs. Loss per share was lower than the Zacks Consensus Estimate. However, sales fell due to lower shipments to carbon spot market and missed the Zacks Consensus Estimate.

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 expects to continue to gain automotive market share in 2013, 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 coal mine plan and expects to begin mining activities in the near future. 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.

Moreover, AK Steel should benefit from the favorable pricing trend for key raw materials such as iron ore, coke and coal. Declining prices for these inputs should acts in its favor.

However, AK Steel is exposed to macroeconomic uncertainties, stemming from the sovereign debt crisis in Europe. It is contending with oversupply in the industry and pricing pressure. Lower spot market prices for carbon steel products are hurting selling prices.

In addition, a weak European economy and slowing growth in Asia are impacting AK Steel’s electrical steel business. We are also concerned about its high cost structure. Hefty maintenance outage costs associated with the Middletown Works blast furnace may weigh on the company’s bottom line in the second quarter.

Other Stocks to Consider

Other companies in the steel industry having favorable Zacks Rank are Angang Steel Company Ltd ( ANGGY ) , LB Foster Co. ( FSTR - Analyst Report ) and Ternium S.A. ( TX - Snapshot Report ) . All of them hold a Zacks Rank #2 (Buy).