Earning Scorecard: AK Steel (AKS)

AK Steel Holding Corporation (AKS), a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products, posted better than expected second-quarter 2010 results primarily driven by higher steel shipments. Yet shares slipped 4% post results on an uncertain outlook over the iron pricing concerns.

Second Quarter Highlights

AK Steel posted net income of $26.7 million or 24 cents per share in the second quarter of 2010, reversing loses of $47.2 million or 43 cents in the year-ago quarter. Excluding one-time charges related to iron ore purchases, AK Steel earned $37.4 million or 34 cents per share, beating the Zacks Consensus Estimate of 7 cents by almost five times.

Revenues

Quarterly revenues more than doubled to $1.6 billion, surpassing the Zacks Consensus Estimate of $1.5 billion, primarily driven by higher shipments. Steel shipments nearly doubled to 1.4 million tons versus last year’s 740,600 tons. Average selling price for the reported quarter inched up 3% year over year and improved 9% sequentially to $1,101 per ton, which further triggered growth.

(Read our full coverage on this earnings report: AKS Beats Handily, Outlook Uncertain)

Agreement of Analysts

Analysts and investors remained negative on AK Steel with higher benchmark iron ore pricing, lower selling prices for steel and a weak operating profit outlook. Although the company outpaced the Zacks Consensus Estimate in the latest quarter, 10 out of the 12 analysts covering the stock for the ongoing quarter slashed their EPS estimates in the last 7 days, while the same number of analysts had made negative revision to their estimates over the last one month.

Of the 11 analysts covering the stock for the full year, 4 raised while 5 lowered their estimates in the last 7 days. Over the last 30 days, 8 analysts downgraded their estimates while 2 moved in the positive direction.

Magnitude of Estimate Revisions

The magnitude of estimate revisions indicates that the analysts were apprehensive about AK Steel’s near-term prospects. Recovery in the company’s Stainless and Electrical Steel segment, the second best performing business segment, remained slow due to an ailing construction and housing market. This is bad news for the company which generates about 43% of its revenues from the segment.

Consequently, the Zacks Consensus Estimate has been on slippery ground since the earnings release. In the last 7 days, the Zacks Consensus Estimate for the third quarter fell 2 cents and for the full year 2010, it decreased 7 cents.

The current Zacks Consensus Estimate is pegged at a modest 2 cents and 62 cents for third quarter and full year 2010, with a downside potential of 150% and 6.45%, respectively.

Our Take

Iron ore pricing concerns have led to a negative outlook for steel manufacturers like AK Steel and Steel Dynamics Incorporated (STLD). Revenues and average selling prices are lower, as the U.S. and global markets are on a gradual recovery. The ongoing slowdown has marred prospects in the construction and housing sectors.

AK Steel’s high margin electrical steel business is most affected by an end market slowdown. Last year, the company saw a significant decline in sales of grain-oriented electrical steel products globally due to the weak economy, which led to lesser consumer spending on new electric power transmission and distribution transformers. Besides, the imposition of duties on the import of electrical goods in China further affected AK Steel’s sales. Though there was some improvement in the electrical products business in the first half of 2010, it still remains below the historical highs.

AK Steel predicts significant uncertainty regarding global iron ore pricing for 2010 and foresees operating profit to decline to $15 per ton in the upcoming quarter, assuming a 65% rise in iron ore benchmark prices. Steel shipments are expected to rise modestly while average selling price per ton would experience a stronger fall.

However, a touch of optimism comes from the company’s diverse product portfolio; focus on products and markets that have greater potential to succeed in the long term as well as a sound liquidity position. This prompts us to remain Neutral on AK Steel in the long term (6 months and higher), with has a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) currently.

AK STEEL HLDG (AKS): Free Stock Analysis Report
STEEL DYNAMICS (STLD): Free Stock Analysis Report

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