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AK Steel's Strong Long-Term Prospects Make It A Good Buy


AK Steel (AKS) recently reported its fourth quarter results that topped the analysts’ consensus. Year over year revenue improved, but earnings declined considerably on account of higher operating cost and lower steel prices. Also, as it reaps around half of its income from the auto sector, the company benefitted from the gaining strength of automotive products. Apart from this, there are other tailwinds that indicate a better road for the steel maker in days to come.

A closer look

During the quarter, net sales increased 36% to $2 billion compared to last year, while adjusted earnings fell to 14 cents a share from a year ago period of 26 cents per share. However, sequentially its financials improved raw material and energy costs reduced from third quarter. Not only this, it was the first full quarter of owning and operating Dearborn Works, which exceeded its own expectations and added to its earnings during the three month period.

AK Steel completed Dearborn’s acquisition in September 2014 for a sum of $707 million. And it proved to be an excellent bid for AK with its substantial gains during the quarter. In fact, the management underestimated its potential during the bid. But after acquiring its assets and evaluating its situation, the management expects even better opportunities for Dearborn over time that will drive both its top and bottom line.

What's driving growth

AK Steel benefitted strongly from the increased demand in the auto sector. As already mentioned, automotive segments contributes significantly to its balance sheet and during the quarter, U.S auto sales rose 4.6%. Consequently its shipments jumped to 2 million tons compared to 1.4 million tons last year. Moreover, the falling oil prices have further bolstered this growth. According to Kelley Blue Book, U.S light vehicle sales is expected to increase to 16.9 million from 16.52 million last year. The build schedules for 2015 are projected to be 2% to 3% higher than 2014 and that would represent the sixth consecutive year of automotive build increases.

But amidst these cheers, we must not forget the challenges it is facing, which if not corrected could lead to drastic results. The company did not give any guidance for the first quarter of 2015, which makes it impossible to predict the annual outlook without the knowledge of the future steel price movement. Along with this, its carbon steel spot market pricing is quite depressing, which is driven by the tremendous increase in imports. This negatively impacted its domestic market putting undue pressure on carbon prices.

The takeaway

However, the government is considering this issue and we could expect some relief for the U.S steel makers in the near future. Apart from this, the Infrastructure and manufacturing market is also strengthening. The management expects the non-residential construction market to be much more favorable in the coming fiscal. These are encouraging facts that has the potential to win back investors' interest. Currently it does not have a trailing P/E, but its forward P/E looks impressive at 5.42, which is huge improvement in its earnings. And to top it all, after touching its 52-week low few days ago, its stock has again started showing momentum and this time it seems to be an attractive bet. Therefore, considering its future prospects, investors can consider adding this stock to their portfolio.


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