AK Steel (AKS, Financial) released good second quarter results, since the company managed to narrow its loss by a big margin. The company surprised investors with unexpected growth in the profit. This led the company’s shares to jump to its two-year high. Management is expecting a better quarter in the future in terms of financial results, as it is seeing growth in its shipments and various other initiatives. Let us look at AK Steel’s moves towards profitability.
Quarterly performance and beyond
AK Steel posted a 9% growth in the revenue to $1.53 billion. The main reason behind this robust growth is the growth in the shipments. Its shipments rose by 5.6% to 1.4 million tons. On the earnings part, it posted loss per share of $0.02, while the consensus had been modeling loss of $0.04 per share.
AK Steel is making meaningful efforts for a solid turnaround. It has proved itself, posting good results with narrow losses. It is further focusing on various initiatives to improve profitability. It is making acquisitions to have a greater exposure to the market which will help it to gain market share by improving its operations.
Impressive moves
The company recently announced the acquisition of Severstal North America’s Dearborn plant located in Dearborn, Michigan. With this acquisition, AK Steel is anticipating that it will increase scale and enhance its operating flexibility. This will also give AK Steel a competitive advantage against the other steel-makers. Further, with this acquisition AK Steel is expecting better and safer opportunities for meaningful productivity improvements.
The company expects this acquisition will generate cost-based synergies of about $50 million per year, of which approximately $25 million is expected to be realized in the first full year after closing the deal. With this acquisition, AK Steel is also expecting a lower income tax, as it will allow AK Steel to more quickly utilize its net operating loss. This will also strengthen its position as a premier North American steel manufacturer.Â
Moving ahead, AK Steel is seeing growth in production. The reports indicate that the automotive market across the U.S is improving, which will increase the demands of steel. The statistics show that the light vehicle build rate has improved by 5% in the past year. AK Steel will be in good position, and with this growing customer base, AK Steel is expected to perform better in the future.
To enhance its offering for the automotive segment, the company is making impressive innovations. It has come up with advanced high-strength steel products including both bare and aluminum-coated pressed hardened steels. These innovations will make the vehicles lighter and stronger. Further in this league of innovations, AK Steel has come up with third generation advanced high-strength steels. This also enhanced AK Steel's carbon steel offering.
AK Steel is also seeing some recovery in the electrical steel market which was under a declining phase in the past. It is seeing good traction for naphtha and is seeing impressive improvement in export shipments. Also, there are many cost cutting initiatives which AK Steel is undertaking. It is refining its cost structure which will help it to lower its cost inputs enhancing the margins.
Conclusion
Because the company is incurring losses, there is no trailing P/E ratio, while the forward P/E of 8.3 indicates that the earnings are expected to grow slowly in the coming days. The company is making acquisitions which are expected to help AK Steel in long run to grow its earnings in future. Even in the long term, its earnings are growing with a CAGR of 5%, which is slow and steady.Â
