This Improving Steel Company Could Be a Good Investment

Author's Avatar
Oct 28, 2014

A.K. Steel (AKS, Financial) is improving as it surprised the Street by swinging to a profit despite an unfavorable winter season that pressurized shipments for iron ore pellets. Looking ahead, the company remains upbeat for rest of the year. However, it expects its shipment to decrease around 3% to $1.35 million tons of steel as compared to the second quarter of 2014. The slowdown in the shipment is due to the reduced production from its Ashland Works blast furnace.

A.K. Steel recently had an outage as it ran through an unplanned maintenance that resulted in the consequent shortfall in its production, which is counterbalanced through the ongoing strong demand from the automotive market.

Still improving

A.K Steel is seeing positive movement in the light vehicle build rate. The light vehicle build rate has risen almost 5% this year compared to last year. The company anticipates the auto builds to go past 17 million units this year. It further sees substantial increase in the auto build rate in the coming years that should certainly drive growth for its bottom lines in the future. Moreover, the company is experiencing a growing momentum in the automakers in the North America, who are expanding their production capabilities that should become profit accretive to the company in the long run and enhance its growth.

Nevertheless, the company should benefit from the average selling price as it expects its average selling price during the third quarter to increase slightly to $1,100 per ton from $1,095 per ton in the second-quarter. The slight uptick in the average selling price is mainly on account of a decrease percentage of product shipments to the carbon spot market for the ongoing quarter as compared to the second quarter.

Enhancing growth

A.K. Steel looks great with the acquisition of Severstal Dearborn that should certainly augment its scale of productivity and provide operational flexibility for the company going forward. It should also help the company in serving its customer effectively. The company expects Severstal Dearborn to produce additional 2.5 million tons of steel per year that should enhance its total shipment to approximately 7.5 million tons produced every year.

In addition, A.K Steel is expected to generate approximately $50 million though this acquisition in its cost-based synergies annually. So, this strategic acquisition should certainly augment its bottom line performance going forward and increase value for shareholders in the long run. Also, this acquisition should strengthen its position in the North America and enhance its existing operation in the region.

Furthermore, the company now looks even better with the start up of Magnetation’s pellet plant in Reynolds, Indiana. The company expects its Magnetation pellet plant to produce new state of the art iron ore pellet. A.K. Steel plans to increase production at its Magnetation pellet plant and remains on track to supply the pellets in calendar year 2015. Magnetation pellet plant has the capacity to produce approximately 3 million of tons of pellet annually. Apart from these moves, the company is practicing various strategic initiatives that should help the company to reduce the cost and enhance its raw materials and assist it to attain energy self sufficiency.

Final thoughts and valuations

A.K. Steel looks pretty good this year with the acquisition of Severstal Dearborn that should maximize shareholders' return going forward. The company is experiencing a growing momentum in every aspects of its business that should help the company to post comprehensively a better performance for the full year. Moreover, the analysts have estimated CAGR of 5%, greater than the average industry CAGR of 3.17% for the next five years that indicate potential growth opportunity for the company.