AK Steel: The Long-Term Performance Can ImproveAKS) badly this year. The company’s revenue in the last reported quarter was down year-over-year, while its loss increased to $64 million from $17 million in the year-ago quarter. Looking ahead, things are not expected to get better any time soon as it has guided for a loss in the ongoing quarter as well.
However, investors should not forget the fact that AK Steel’s financial performance could improve in the long run as conditions in the end market improve, especially because the company is making impressive product improvements.
Product development will drive growth
AK Steel is focusing on product innovation. It recently introduced aluminized ULTRALUME for Advanced High-Strength Steel (AHSS) automotive applications. CHROMESHIELD 22, which is a nickel-free stainless steel product for auto exhaust, architectural, cookware and food processing systems, was also released recently. In addition, AK Steel launched THERMAK 17, designed for automotive exhaust mechanisms and the company is building advanced AHSS with much higher formability and strength.
AK Steel is continuously delivering cutting-edge technology and product innovation by offering highly-advanced and superior high strength steels to its customers. Further, the steel major recently acquired Dearborn Works for $29 million, which is believed to adjust the Hot Dip Galvanizing Line to generate both cold rolled and coated advanced AHSS.
This planned acquisition contributed to the company’s shipments last quarter, reported at 1,811,700 tons as against 1,397,500 tons in the second quarter of 2014 and 1,750,500 tons during the first quarter of 2015.
The advanced product line of AK Steel is estimated to increasingly draw many more strategic customers to its already diversified customer basket.
End market drivers
The light vehicle production in North America and rest of the world is estimated to grow at a CAGR of 2.3% and 3.8%, respectively, from fiscal years 2014 till 2019. The U.S. housing starts and U.S. non-residential construction fixed investments are forecasted to grow at a CAGR of 9.9% and 5.9% respectively. These superior year-over-year developments are expected to drive significant global steel demand and thus benefit the key steel major.
The slow but steady improvement in the global demand fundamentals coupled with the company’s continued reduction in future cash requirements is believed to strengthen its balance sheet and encourage the key steel producer to make strategic growth investments while returning a majority of the invested capital to its key stakeholders.
Though it is evident that AK Steel is making robust improvements in its operations, it cannot be denied that the company is suffering due to weakness in the end market. As such, investors should not go bottom hunting in AK Steel shares until and unless the conditions in the steel market improve. Moreover, AK Steel’s balance sheet is debt-burdened as its debt stands at $2.44 billion as against a weaker cash position of $75 million. So, in the long run, even though AK Steel shares might do well, investors should avoid them in the short run.
Published on Sep 26, 2015By Vinay Singh