AK Steel Holding Corporation (AKS) posted net income of $26.7 million or 24 cents per share in the second quarter of 2010, reversing loses of $47.2 million or 43 cents in the year-ago quarter. Excluding one-time charges related to iron ore purchases, AK Steel earned $37.4 million or 34 cents per share, beating the Zacks Consensus Estimate of 7 cents by almost five-fold.
Quarterly revenues more than doubled to $1.6 billion, surpassing the Zacks Consensus Estimate of $1.5 billion, primarily driven by higher shipments. Steel shipments nearly doubled to 1.4 million tons versus last year’s 740,600 tons. Average selling Price for the reported quarter inched up 3% year over year and improved 9% sequentially to $1,101 per ton, which further triggered growth.
Steel Shipments
AK Steel reported its highest steel shipments since 2008, which bolstered the robust revenue growth. Coated steel products formed 47.3% of total shipments; the rest came from cold-rolled (19.6%), stainless/electrical (15.1%) and tubular (2.3%) products.
Stainless/Electrical products’ shipments were up 47% to 218.9 million tons, while coated and cold-rolled product shipments doubled to 685.2 million tons and 284.7 million tons, respectively.
Costs and Operating Income
Higher raw material (iron ore) costs resulted in a 78% increase in operating costs. Yet AK Steel recorded operating income of $65.6 million or $45 per ton, as opposed to an operating loss of $72.5 million or $98 per ton in the second quarter of 2009. Strong revenues negated higher raw material costs.
Balance Sheet
AK Steel has total debt of $502.6 million as of June 30, 2010. The company ended the second quarter of 2010 with $129.5 million of cash and $700.6 million of cash availability under its credit facility, for total liquidity of more than $830 million.
Outlook
AK Steel also stated that there exists significant uncertainty regarding global iron ore pricing for 2010. The company foresees operating profit of about $15 per ton in the third quarter of 2010, assuming a 65% rise in iron ore benchmark prices. The company expects third quarter shipments to rise 3%, while average selling price per ton is expected to fall about 5% sequentially. Planned maintenance costs are expected to decline about $4 million compared to the second quarter.
Zacks Recommendation
AK Steel Holding Corporation has a more diverse product portfolio than its peers. The company is focusing on markets and products that have greater potential in the long term. AK Steel outperformed its nearest peer, Steel Dynamics (STLD) which earned 22 cents for the second quarter of 2010, missing the Zacks Consensus Estimate by 2 cents while it lagged first quarter income by 7 cents.
However, average selling prices are lower, as the U.S. and global markets are on a gradual recovery. The ongoing slowdown has marred prospects in the housing and construction sectors. Steel Dynamics have also provided a bleak overall demand outlook, although it expects end markets to stabilize. We expect AK Steel to report a weak third quarter with steel prices moderating.
Meanwhile, the Zacks Consensus Estimate on AK Steel’s earnings for the third quarter has declined by 2 cents in the past week to 22 cents per share, as 3 of 11 covering analysts downgraded their expectations with no positive revisions. For entire 2010, the Zacks Consensus Estimate has been reduced by 10 cents over the past month, as 6 of 12 analysts lowered projections, with none moving in the opposite direction.
Currently, AK Steel has a short-term Zacks #5 Rank (Strong Sell) but a long-term Neutral recommendation.
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