AK Steel (AKS, Financial) had witnessed significant challenges in the first quarter of 2015 primarily due to the notable import of superior carbon steel products matching the expenditure of domestic manufacture and supply. Hence, the steel major sold fewer steel stocks at much lower price in the bulk carbon steel market against its higher expectations.
Making the right moves
The lately acquired Dearborn facility in Michigan has made significant progress linked to safety over the previous several months. The facility set up an initial first quarter record of just three OSHA recordables.
The hardships faced by AK Steel in terms of declining margins due to a tough competition from the domestic steel producers is believed to continue until the company implements a new lower-cost steel production technology to improve the overall production and profitability.
According to the Jacobson survey during the first quarter of 2015, AK Steel is again awarded the top position in delivering carbon steel compared to its key integrated steel rivals regarding superior quality, excellent service and right on time delivery along with a first position in general customer satisfaction.
AK Steel is also witnessing a solid increase in the overall automotive shipments encouraged by a projected 2.5% expansion in the 2015 NAFTA light-vehicle production to approximately 17.4 million units compared to last year. Crucially, the automotive shipments of AK Steel have enhanced at greater rates over the entire automotive market shipments.
The superior quantity and quality of the AK Steel’s overall steel production as verified by the recent survey is estimated to boost confidence in the key stakeholders regarding the future growth prospects of the company. Also, the improvement in the company’s automotive shipments better than the industry’s average highlights the robust growth strategy of the steel major.
The significant increase in the overall imports from the key vendors such as China, Turkey and South Korea, primarily in the previous three months has resulted in major fall in the spot market pricing for the United States.
Growth drivers
Considering the electrical steel business of AK Steel in the first quarter of 2015, the product shipments for NAFTA, Grain-Oriented Electrical Steel or GOES achieved approximately 4% greater level compared to the fourth of 2014 owing to the general housing market recovery. In addition, GOES product exports enhanced by double-digit percentage points with slight improvement in the worldwide market conditions.
The accelerated steel imports from the major vendors across the globe are believed to continue with the expanding global demand and continue hurting the margins of AK Steel, going forward. However, the company’s electrical steel business is forecast to gain notably from the ongoing and rapid housing market recovery.
The strategic acquisition of Dearborn seems to expand the financial strength of AK Steel. It is believed to be financed with a well-planned combination of debt and equity. The acquisition has improved AK Steel’s liquidity position and is estimated to be important to credit-growth and notable earnings. Moreover, S&P and Moody’s have reiterated the credit rating for AK Steel and enhanced the company’s outlook to stable.
The continued lower debt levels in addition to improved overall liquidity depicts the superior execution strategy of the AK Steel targeted on lowering the key capital expenditures and driving enhanced traction through strategic successful acquisitions.
The consensus estimate among 19 polled investment analysts evaluating AK Steel Holding Corporation suggests investors to hold their position in the stock. This consensus estimate is maintained since the investment analyst’s sentiments declined on Feb. 2, 2012. The earlier consensus estimate suggested that the company would outperform the market.
Therefore, the analyst sentiments does not look positive for the investments into the stock and thus, investors are advised to again hold their position into AK Steel until a major turnaround occurs and the pricing environment gets better for the stock to drive profitability.
Conclusion
Overall, investors are advised to hold their positions in AK Steel Holding Corporation looking at the declining growth prospects with PEG ratio of -1.71. The profit margin of -1.49% depicts no profit but loss. Further, the company is hugely debt-burdened with significant total debt of $2.45 billion against weaker total cash of $70.20 million only, restricting AK Steel to plan for future growth investments.
