We are maintaining our Neutral recommendation on AK Steel Holding Corporation (AKS). The company’s first-quarter 2012 net loss of 11 cents a share matched the Zacks Consensus Estimate. Revenues dipped 4.6% year over year to $1,508.7 million, trailing the Zacks Consensus Estimate.
Shipments fell 6.8% year over year while average selling price moved up 3% in the quarter. Selling price benefited from better product mix, higher contract sales and increased prices for certain products. AK Steel witnessed a slow but steady improvement in underlying market conditions during the quarter.
Moving ahead, the company expects to post a profit in the second quarter. It remains optimistic that business conditions will improve in the quarter on the back of increased strength in the automotive market. The company further anticipates that shipments will be higher in the second quarter and expects raw material costs to be lower sequentially.
AK Steel mainly focuses on products with high margins. Carbon, stainless and electrical steel continue to be the company’s strongest product line. The revival in demand in the U.S. and abroad, though at a slower rate, bodes well for the company.
AK Steel is also seeing growth in the average selling price for its products. Moreover, the company is witnessing increased demand for its carbon steel products and has been raising prices in the spot market to recover high steelmaking input costs.
We expect AK Steel’s results, in 2012, to be supported by higher shipment of carbon steel products to the automotive market. The company should benefit from the strong momentum in the automotive market, which accounted for a third of its sales in the most recent quarter.
AK Steel’s automotive shipment was robust in first-quarter 2012, reaching a record level since the second quarter of 2008. The company is expected to benefit from strong auto build rates in the second quarter. It estimates shipments of carbon steel products to automakers to rise 20% year over year in 2012.
However, we prefer to remain on the sideline considering softness in the construction market, challenging operating environment in the overseas markets and weaker international electrical steel prices.
AK Steel is still affected by weak construction and housing sectors. The company is also exposed to macroeconomic uncertainties, stemming from the sovereign debt crisis in Europe and sluggish growth in Asia. Moreover, electrical steel prices remain under pressure in overseas markets given the soft operating backdrop.
AK Steel, which competes with Nucor Corporation (NUE), U.S. Steel Corp. (X) and Steel Dynamics Inc. (STLD), currently holds a short-term Zacks #4 Rank (Sell).
AK STEEL HLDG (AKS): Free Stock Analysis Report
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STEEL DYNAMICS (STLD): Free Stock Analysis Report
UTD STATES STL (X): Free Stock Analysis Report
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