Higher steel prices and some easier comparisons have AK Steel (AKS) set to swing back to profitability in the most recent quarter, but AK Steel stock still looks like a pass.
Like the rest of the steelmakers, AKS is slowly taking advantage of better economic times after the global recession clobbered demand for steel.
True, low-growth in China still weighs on prices, but other industries — such as housing, construction, automotive — are ramping up.
Indeed, the housing and construction industries are the largest consumers of steel, and they’re both incrementally healthier quarter after quarter.
After housing and construction, the automotive industry uses the most steel, and there, too, demand is growing. U.S. car sales are up 1.3% year-over-year so far in 2014, and sales of SUVs and crossovers are more than 12% higher.
Greater demand has done wonders for steel prices, which were languishing at all-time lows in the summer of 2013. Yes, they still sit at about only a third of their record highs, but tighter supply and improving demand set up some easy comparisons in the most recent quarter. Consider that in late October, AK Steel was able to hike prices on carbon flat-rolled products.
Although that all means better news for the top line, it doesn’t automatically make AKS stock a buy ahead of Tuesday’s quarterly earnings report. AK Steel is forecast to swing to a profit of 9 cents per share — up from a loss of 23 cents per share in last year’s quarter — according to a survey by Thomson Reuters. Revenue is projected to increase 12% to about $1.5 billion.
AK Steel Stock Strains Against Issues
But AKS stock has too many headwinds to get excited about it at current levels. For one thing, any good news in quarterly earnings already seems to be reflected in the AKS stock price, which has rallied sharply since mid-October.
Also, be forewarned that AKS is a year-to-date loser with tremendous volatility. AKS stock is down 10% on the year after logging a YTD gain of 33% in August and a YTD loss of 33% in mid-October.
But the biggest knocks against AK Steel and AKS stock are its cash-flow statement and the outlook for steel prices.
Steel stocks correlate strongly with steel prices, analysts note, meaning this is not a great time of the year to bet on upside. After all, steel demand is seasonal and usually weakens as the weather get colder and slows down the construction industry.
Another big worry for AK Steel is the way it burns through cash. The company’s pension plan is underfunded by almost a billion dollars, and so AKS is scrambling to plug the hole with hundreds of millions of dollars in cash contributions.
Lastly, this is a really low-growth stock. The valuation isn’t unreasonable, trading at 5 times forward earnings on a 5% long-term growth forecast, but then who needs a super-slow-growth stock that’s volatile and pays no dividend? Anything with that growth trajectory should be a fountain of income.
AK Steel stock might very well get a bump on quarterly earnings, but beyond that there is no compelling reason to own this name.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
