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AK Steel (AKS) Poised on Strategic Actions Amid Headwinds

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On Oct 9, we issued an updated research report on steel producer AK Steel Holding Corporation (AKS - Free Report) .

AK Steel delivered strong second-quarter 2017 results, reflecting continued benefits obtained through strategic initiatives implemented over the past one-and-a-half year.

AK Steel, during second-quarter 2017 earnings call, declared that it expects shipments in the third quarter to be relatively flat compared to the second as higher shipments of the carbon distributing and converting market are expected to be offset by lower automotive shipments. Average selling price in the third quarter is expected to be modestly lower than the second. The expected decline assumes a change in the mix of shipments related to an anticipated reduction in automotive shipments and decline in raw material surcharges.

Price Performance

Shares of AK Steel have declined 12.7% in the last three months, underperforming the industry’s 4.8% growth.

 

 

Automotive Expansion, Cost-Cuts to Boost Growth

AK Steel is expected to benefit from strong demand in the automotive market. AK Steel remains focused on expanding its core automotive business and is laying importance on de-emphasizing commoditized products and launching new value-added products. The company is currently developing third-generation, advanced high-strength carbon steels for automotive customers that are considerably stronger than current product offerings.

The acquisition of Precision Partners is also in sync with AK Steel's commitment to broaden its portfolio of high-value products and processes and reinforces collaboration with the company’s automotive market customers.

The company’s sustained initiative to manage costs amid a challenging operating environment is also expected to lend support to its bottom line. AK Steel is looking for cost-saving opportunities in 2017 through a number of means including process improvement, headcount cuts, reduction in process time and procurement activities.

A Few Headwinds

However, AK Steel faces weakness in electrical steel pricing in the overseas 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 remains exposed to margin pressure associated with elevated input costs.

Moreover, the U.S. market is still seeing high levels of imports of steel products notwithstanding a series of trade actions in the recent past. According to the American Iron and Steel Institute (AISI), total and finished steel imports increased 20.6% and 15.5% year over year, respectively, for the first eight months of 2017. AK Steel is also witnessing an increase in grain-oriented electrical steel imports into the United States, especially from China, Korea and Japan.

 

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the basic materials space are Sociedad Quimica y Minera de Chile S.A. (SQM - Free Report) , The Chemours Company (CC - Free Report) and FMC Corporation (FMC - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Sociedad Quimica has an expected long-term earnings growth rate of 32.5%.

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

FMC Corporation has an expected long-term earnings growth rate of 11.3%.

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