We are upgrading our recommendation on AK Steel Holding Corporation (AKS) from Sell to Neutral given our expectations that the company’s core operating results will turn profitable by the second quarter of 2011. We expect this to be driven by higher carbon steel prices which will more than offset higher raw material costs and weaker electrical steel prices.
The company reported an increase in revenues of 5.5% year over year to $1,390.6 million in the fourth quarter of 2010, which was in line with the Zacks Consensus estimate. For the full year 2011, the company reported net sales of $5,968.3 million, an increase of 46.4% year over year and slightly above the Zacks Consensus Estimate of $5,966 million.
The company incurred an adjusted after-tax loss of $54.5 million or 49 cents per share in the fourth quarter, which outperformed the Zacks Consensus Estimate of a loss of 62 cents per share. Even for the full year 2010, the company reported an after-tax loss of $59.8 million or 54 cents per share, which again outperformed the Zacks Consensus Estimate of a loss of 68 cents per share.
AK Steel looks forward to a strong first quarter of 2011 with higher shipments and prices. The company is expecting a 5% to 7% sequential increase in shipments in the range of 1,425,000 tons to 1,450,000 tons. Since the market for the company’s products remains strong, it expects its first quarter 2011 average per-ton selling price to soar approximately 8%, or $80 per ton.
The expected rise in the average selling price is ascribed to an anticipated higher contract, spot market prices and an improved product mix. The company also expects a marked improvement in the operating levels in the first half of 2011 versus the fourth quarter of 2010.
In order to ensure a steady supply of its raw material coke at its disposal and also at stable prices, the company signed an agreement with Haverhill North Coke Company, an affiliate of SunCoke Energy Inc., which is slated to provide AK Steel with up to 550,000 tons of coke annually.
AK Steel has also reached another agreement with Middletown Coke Company Inc.; one of SunCoke’s affiliates to construct a heat-recovery coke battery with a capacity of 550,000 tons of metallurgical grade coke annually.
In addition to this, the company also adopted certain measures to reduce its costs by announcing its plans to shut down its Ashland, Kentucky coke plant in the first half of 2011. The plant, no longer profitable to the company, requires huge maintenance expenses apart from having increasingly stringent environmental regulations. The company thus entered into supply contracts with third parties to provide coke to its Ashland steelmaking facility at a lower cost.
However, on the flip side, the company has a higher cost structure versus its peers primarily because of its reliability on external customers for raw materials and expects costs for its raw materials (scrap, iron ore, coal) to remain challenging in the first quarter of 2011.
The company’s electrical steel business also remains hit by recession. Although the electrical steel segment showed some signs of improvement in the first half of 2010, the present market conditions will affect the company’s ability to negotiate for higher prices in 2011.
We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Ohio-based AK Steel Holding Corporationis a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products. It operates 7 steel-making and finishing plants in Ohio, Pennsylvania, Indiana and Kentucky. About 86% of the company’s sales revenues come from the U.S. market and the remaining 14% from other countries.
The company supplies to 3 markets – Automotive Appliance,Industrial Machinery & Equipment and Construction and Distributors, Service Centers and Converters. The company competes with Nucor Corporation (NUE) and Steel Dynamics Inc. (STLD).
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