AK Steel Holding Corporation (NYSE:AKS) — I reviewed AK Steel on Jan. 3, with a buy at $10. If you bought it and entered a recommended stop-loss at $9.25, you took a small loss.
Yesterday Bank of America raised United States Steel Corporation (NYSE:X) to a “buy” from “neutral.” I last reviewed U.S. Steel on Dec. 15, recommending it be bought under $35, and although early on the stock, and the group, I now believe that good-quality steel companies, including X and AKS, should be given another look. Note that virtually every steel company of worth rallied yesterday.
Focusing back to AKS: The company produces flat-rolled carbon, stainless and electrical steels for the automotive, construction, electrical power generation and other markets. On Dec. 1 S&P Capital IQ increased their target by $3 to $11 and increased it again on Jan. 25 to $12 because of improving investor sentiment toward steel stocks and a generally higher demand of steel products.
More punitive tariffs on imports by the new presidential team and a forecast of solid margin expansion in 2017 and 2018 encouraged a more positive review by S&P. AKS stock reported 2016 operating earnings per share of 56 cents vs. S&P’s EPS estimate at 30 cents. This encouraged them to increase their 2017 EPS by 25 cents to $0.80, and forecast 2018’s EPS at $1.
They have generally increased their outlook for the industry with a forecast of higher steel prices and cost controls, which should drive earnings growth. Longer term, earnings should rise, assisted by a decline in pension and healthcare costs, greater internal sourcing of materials and a better, more profitable, product mix. A stronger balance sheet is noted by S&P, after two equity offerings in 2016 resulted in dilutive equity raises.
AKS’s powerful bull market that began several months ago was interrupted by profit-taking that drove the stock down to close a continuation gap opened following the November breakout. It is unlikely that the break-away-gap at $6.14 – $6.67, marking the major breakout, will be closed. Following the December high, the stock consolidated but lost momentum due to profit-taking and fear of a trade war with China.
However, from a technical viewpoint, the stock appears to have declined to a bargain level while maintaining its bull market posture. Therefore buy AKS stock at $7.90 with a trading target of $10 for a proposed gain of over 25%.
Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.
