AK Steel (AKS) Poised On Auto Momentum, Risks Remain

On Aug 16, we issued an updated research report on steel maker AK Steel (NYSE:AKS) .

AK Steel swung to a profit in second-quarter 2016 on operational improvements and lower costs. Earnings beat the Zacks Consensus Estimate while sales missed the same. Sales declined by double digits year over year due to lower automotive contract pricing and reduced shipments. Shipments fell as a result of management’s decision to reduce exposure to the commodity carbon steel spot market.

AK Steel is well placed to gain from strength in the automotive market and higher shipment of steel products to automakers, supported by increased automotive builds. The company is witnessing continued momentum in the automotive market, driven by high rates of light vehicles production and sales. Automotive contribution to the company’s revenues was 60% last year.

Automakers are witnessing higher production and sales, which are driving the shipments of AK Steel’s carbon and stainless steel products. AK Steel’s shipments to the automotive market climbed 10% year over year in the second quarter. Healthy demand for the company’s carbon and stainless steel products from its automotive customers is expected to continue in the second half of 2016.

Moreover, the acquisition of the Severstal Dearborn plant has provided AK Steel an access to highly modernized and upgraded steelmaking equipment and facilities. AK Steel also remains committed to provide competitive pricing in the current operating environment. Price increases in the spot market for various steel products have been observed of late. The company should also gain from its cost-reduction actions.

However, the steel industry is still not out of the woods. The U.S. steel industry remains under the risk of cheaper imports despite some favorable developments on the import front in the recent past (in the form of imposition of heavy tariffs on imports). The industry also continues to reel under overcapacity.

Unfairly-traded, subsidized imports are still flowing into the American market due to foreign producers' overcapacity. China, which accounts for around half of global steel output, continues to pose a threat to the U.S. steel industry.

Moreover, AK Steel is expected to see continued pressure on its shipments in the near term. The company expects a modest decline in shipments in the third quarter compared to the second due to planned manufacturing outages and shutdowns at certain automotive customer facilities.

The company also expects shipments to distributor and converter markets to decline as it continues to cut exposure to the commodity spot market and shift to a more value-added product mix. Moreover, shipments and prices of electrical steel remain under pressure in overseas markets due to the global steelmaking overcapacity and impact of certain international trade cases.

AK Steel has a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the steel space include ArcelorMittal (NYSE:MT) , Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) and Olympic Steel Inc. (NASDAQ:ZEUS) . While both ArcelorMittal and Schnitzer Steel sport a Zacks Rank #1 (Strong Buy), Olympic Steel carries a Zacks Rank #2 (Buy).