AK Steel: This Steelmaker is Gradually Improving

There has been a continuous decline in the prices for key inputs of steelmaking, particularly carbon scrap and iron ore. As a result, AK Steel (AKS, Financial) has reported healthy operating performance at Dearborn Works which exceeded its own elevated estimates and benefited its earnings.

The solid increase in the company shipments for the quarter and enhanced operating performance at Dearborn Works is expected to benefit the steel company in the long-term.

AK improved its automotive shipments by 12%, compared to the total auto market sales that increased by approximately 6%. The electrical steel business and the auto-chrome supplies have recovered. AK concluded its key investments in some planned raw material deals as a part of its lasting strategy to enhance its self-sufficiency, solidify its position and lower its costs.

In 2015, AK is facing the pricing decline headwinds in the key carbon steel spot market primarily due to an excess supply of the product to the current weaker demand.

Growth areas to watch

The increased automotive supplies allow the company to direct its strategic investments to some significant raw material deals. However, the weaker overall market demand coupled with the increased steel supply, is forecasted to lower the price of the company’s steel offerings and hurt its margins.

Considering the sales mix for this year, AK estimates nearly 75% of its sales to occur in the contract market with the rest 25% in the spot market for 2015.

AK Steel has demonstrated improvement in its automotive business with the contract market rising significantly. However, this expansion is believed to be partially offset by poor steel market demand.

Still, an autonomous survey of carbon steel customers by Jacobson and Associates proved AK Steel to be a leader in quality, timely delivery of service and general customer fulfilment as compared to its incorporated steel competitors.

AK Steel’s major operating vertical is the automotive market segment comprising of about 50% of its total sales. It has increased its target for the automotive build schedules for 2015 to be in 2% to 3% range above the 2014 levels and representing the sixth successive year of automotive build enhancements. There is expected to be improved shipments of carbon and stainless steel to automotive customers during this year due to healthy prospects of the automotive sector, which implies auto builds expanding over 17 million units in 2015.

The solid execution of the growth strategy in major steel markets is supported by the disciplined expansion approach of the company, allowing it to stay ahead of its key competitors.

The housing market has also recovered significantly, increasing over 7% in 2014. The fresh housing start ups touched the 1 million unit mark since last year and for the first time since 2007. During fiscal year 2015, AK expects the innovative housing start ups to expand by approximately 20% to about 1.2 million units. The significant housing recovery is expected to enhance the power generation and transmission demand, HVAC and appliance demand, and the general steel demand.

AK is believed to benefit hugely from the recovery of the infrastructure and manufacturing of I&M market, with growth in both residential and non-residential construction activities, along with the development of overall manufacturing.

The healthy recovery of the housing market along with improvement in I&M market is forecasted to significantly benefit AK Steel by expansion in its steel shipments.

Product focus

Moving ahead, AK Steel is focused on increasing its assortments for strip and speciality sheet products which are primarily produced at its Coshocton Works. Recently, AK launched the innovative CHROMESHIELD 22 product.

AK Steel is buying approximately 70% of its iron ore needs in the open market with the rest, nearly 30% being provided by its Magnetation business. Magnetation is progressing significantly in expanding its innovative pellet plants in Indiana, Reynolds and supplying pellets are to be leveraged in its Ashland Works blast furnace.

The newer varieties of steel offerings are estimated to drive significant customer traction for the AK Steel products. Also, the expansion of AK Steel joint venture with Magnetation is estimated to prove beneficial to the former in a long-term for the supply of raw materials.

Conclusion

Overall, the investors are advised to cautiously invest into the AK Steel Holding Corporation looking at the huge company debt levels with total debt of $2.45 billion against the minuscule total cash level of $70.20 million. The PEG ratio of 1.78 signifies slower company growth compared to the robust industry’s average of 0.84. The profit margin of -1.49% suggests no profit but loss.