On Jan 7, Zacks Investment Research upgraded steel company AK Steel Holding Corporation (AKS) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
AK Steel has provided an upbeat outlook for the fourth quarter of 2013 and expects shipments to rise sequentially. It has renewed contracts with automotive customers and secured higher contract pricing. The company estimates shipments to auto customers to exceed 16 million units in 2013.
The construction market also exhibited strength and AK Steel predicts total construction spending in 2013 to surpass $900 billion for the first time since the onset of the Great Recession. In addition to this, private construction has also rebounded by more than 40% since its low point in early 2009.
AK Steel is investing to secure around half of its iron ore pellet and coal requirements internally. The company is making good progress with its first coal mine (North Fork) at AK Coal and is ramping up mining volumes. The company projects the cost of coal at AK Coal to be 25% to 30% lower than market prices.
AK Steel is also making significant progress with its iron ore pellet project at Magnetation. Construction of the pellet plant (expected to meet 50% of iron ore pellet requirements) at Magnetation is currently underway. Both these strategic investments are likely to improve the company’s cost structure and strengthen its position in the years ahead.
AK Steel should benefit from the strong momentum in the automotive market. Automakers are witnessing higher production and sales, which are driving shipments of the company’s stainless steel products. The automotive market’s contribution to the company’s revenues is currently trending around 50%, which is higher than the 45% achieved in 2012.
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 work in its favor.
Other Stocks to Consider
Other players in the steel industry worth considering are ArcelorMittal (MT), Companhia Siderurgica Nacional (SID) and U. S. Steel Corporation (X). While ArcelorMittal and Companhia Siderurgica Nacional hold a Zacks Rank #1 (Strong Buy), U.S. Steel has a Zacks Rank #2 (Buy).
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