The prospects for the steel industry haven’t really changed of late — the economics of the industry broadly suggests weak commodity pricing and slumping demand.
But don’t tell that to investors of AK Steel Holding Corporation (NYSE:AKS), who are enjoying roughly 40% gains in AKS stock since the end of January.
Of course, that’s coming on an enormous rebound. AKS stock hit a multiyear high above $11 in late August, but even with its recent gains, AKS stock has plummeted 55%. In fact, it’s still down 16% year-to-date.
So, with the West Chester, Ohio-based company due to report first-quarter earnings results Tuesday before the open, AKS investors have an important decision to make — whether to buy, sell or hold.
From my vantage point, the decision is clear. As they say, get out now while the getting is good. Let’s not press our luck.
The Case Against AK Steel
Look, it’s true AK Steel management has done what it can to make the best out of a bad situation. The company’s fourth-quarter earnings beat was the most recent example.
But this is not a bet on management or AKS stock itself. This is a wager on an industry that has been in decay for almost a decade, as competitors like United States Steel Corporation (NYSE:X) can attest.
Consider that, even amid its fourth-quarter earnings beat, AK Steel suffered a 4% year-over-year decline in average selling prices, falling from $1,031/ton to $987/ton. AK Steel blamed the decline on the fact that it had a higher proportion of hot-rolled coil shipments in its overall sales mix.
Sure, shipments were higher, up 42% year-over-year. And this might have given AKS stock holders some encouragement. But the higher demand was due to AK Steel picking off Dearborn Works in September.
In other words, the organic growth of this business is still the issue.
And for AKS stock to work as an investment in the long term, investors must reconcile the potential effect of the company in March cutting its earnings projections for the just-ended quarter.
The company now expects a loss of 23 to 28 cents per share versus prior guidance of a 3-cent profit. And here’s the thing: At the start of the quarter, analysts had profit projections as high as 14 cents per share.
This has devolved into a projected loss of 25 cents.
Bottom Line
Sure, a loss of 25 cents still would be a narrower loss than last year’s 40-cent deficit. It’s also encouraging that revenue of $1.74 billion is projected to be up 26% YoY. But one imagines the 14-cent profit expected at the start of the quarter at least had something to do with the 40% spike in AKS.
Why, then, hasn’t the stock reacted to the loss AKS now expects for its first quarter?
This open-ended question is what makes AKS stock a risky play ahead of Tuesday’s results. Also of concern is the fact that AK Steel’s full-year loss is projected to widen to 47 cents from last year’s 40 cents.
Accordingly, smart investors would do well to lock in profits now and wait for AKS to issue its outlook for the next quarter and the rest of the year. After a strong run-up in the stock, a pullback to around $4 per share, or 20% lower, seems plausible based on lowered estimates for the June and September quarters.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
