On Feb 27, we issued an updated research report on steel maker AK Steel AKS. While the company is well placed to gain from strength in the automotive market, its acquisition of Severstal Dearborn and strategic raw material investments, it is exposed to a volatile pricing environment and high levels of steel imports.
AK Steel’s profit for fourth-quarter 2014, reported on Jan 27, tumbled on higher operating costs. Adjusted earnings, however, topped the Zacks Consensus Estimate. Sales surged year over year on higher shipments and beat expectations. AK Steel plans to announce detailed guidance for first-quarter 2015 this month.
AK Steel, a Zacks Rank #3 (Hold) stock, should benefit from strength in the automotive market and higher shipment of steel products to automakers in 2015, supported by increased automotive builds. The company gets more than half of its revenues from this market which continues to show strong momentum.
AK Steel’s shipments to automotive customers rose 12% year over year in 2014. Solid demand for the company’s carbon and stainless steel products from its automotive customers is expected to continue this year. Automotive builds have been projected to rise 2%-3% year over year in 2015.
Moreover, the acquisition of the Severstal Dearborn plant is expected to boost AK Steel’s future earnings and improve its credit profile and liquidity. The acquisition has provided the company 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 $50 million from the buyout in 2015.
AK Steel should also benefit from its strategic investments to procure about half of its iron ore and coal requirements internally. It is progressing well with its coal mine at AK Coal and its iron ore pellet project at Magnetation. Moreover, AK Steel is expected to gain considerably from lower steelmaking input costs in 2015.
However, AK Steel remains exposed to pricing pressure and increased steel imports. The U.S. market is seeing higher imports of steel products. This, in addition to the oversupply, is affecting the prospects of steel producers.
AK Steel witnessed over 11 million tons of flat-rolled carbon steel imports in 2014 versus less than 7 million tons in 2013. Increased supply is putting pressure on steel pricing in the domestic market. AK Steel is seeing lower pricing in the carbon steel spot market.
Other Stocks to Consider
Some other stocks worth considering in the steel space include Kobe Steel Ltd. KBSTY, ThyssenKrupp AG TYEKF and LB Foster Co. FSTR. While Kobe Steel and ThyssenKrupp retain a Zacks Rank #1 (Strong Buy), LB Foster is a Zacks Rank #2 (Buy).
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