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AK Steel Well Placed on Auto Momentum Amid Headwinds

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On Nov 12, we issued an updated research report on steel maker AK Steel (AKS - Free Report) .

AK Steel swung to a profit in the third quarter of 2015, aided by strong shipments to the automotive market and lower input costs. Earnings for the quarter beat the Zacks Consensus Estimate. Sales rose year over year on higher shipments, and topped expectations.

However, higher imports resulted in a decline in carbon steel spot market selling prices in the third quarter, leading to a 16% year-over-year fall in AK Steel’s average selling price.

AK Steel plans to announce its detailed guidance for the fourth quarter next month. The company expects lower carbon steel pricing in the fourth quarter on a sequential comparison basis due to high levels of cheap foreign steel imports into the U.S. market and reduced carbon scrap prices. It also sees lower carbon steel spot market shipments in the quarter.

The company, last month, divulged its plans to temporarily idle the blast furnace and related steelmaking operations at its Ashland, Kentucky Works plant due to challenging market conditions stemming from a deluge of imports of steel products into the U.S. market. The idling of the affected parts of the plant will start in mid-Dec 2015 and could last more than six months, if the market conditions do not improve. AK Steel has notified the hourly and salaried employees at the facility about the work suspension.

AK Steel should benefit from strength in the automotive market and higher shipment of steel products to automakers, supported by increased automotive builds. The company gets more than half of its revenues from this market which continues to show strong momentum.

Automakers are witnessing higher production and sales, which is driving the shipments of AK Steel’s stainless steel products. Solid demand for the company’s carbon and stainless steel products from its automotive customers is expected to continue moving ahead.

Moreover, the acquisition of the Severstal Dearborn plant has provided AK Steel an access to highly modernized and upgraded steelmaking equipment and facilities. With the acquisition, AK Steel expects its annual shipments to exceed 7.5 million tons. The company envisions potential costs synergies of around $58 million from the acquisition in 2015, with over $43 million achieved in the first nine months.

AK Steel should also benefit from its strategic investments to procure about half of its iron ore and coal requirements internally. Moreover, the company is expected to gain from lower costs of key steelmaking raw materials (mainly iron ore).

AK Steel currently holds a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other companies in the steel and metals space worth considering include NSK Ltd. , Worthington Industries, Inc. (WOR - Free Report) and Norsk Hydro ASA (NHYDY - Free Report) . While NSK holds a Zacks Rank #1 (Strong Buy), both Worthington and Norsk Hydro sport a Zacks Rank #2 (Buy).

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