AK Steel Is Not Going Bankrupt

AK Steel (AKS) is witnessing strong growth. It had announced net sales of $1.71 billion on shipments of about 1,871,200 tons as against net sales of $1.59 billion on shipments of nearly 1,462,900 tons for the same period last year and net sales of $1.69 billion on consolidated shipments of approximately 1,811,700 tons in the second quarter of 2015.

AK Steel also declared 2015 adjusted EBITDA of $120.0 million, or $64 per ton as against adjusted EBITDA of $100.5 million, or $69 per ton in the third quarter of 2014 and adjusted EBITDA of $47.6 million, or $26 per ton during the second quarter of 2015.
The company also concluded the quarter with an impressive liquidity position of $821 million and $747.8 million outstanding under AK Steel’s revolving credit facility.

The key steel manufacturer reported healthy financial results for the quarter, primarily driven by impressive automotive shipments, reduced raw material costs and robust operations coupled with notable cost savings from achieved from the strategic incorporation of Dearborn Works as well as several other cost reduction efforts executed all through the company’s key processes.

Impressive points     

The steel manufacturing company is believed to have a solid balance sheet with an impressive liquidity position of approximately $800 million as of June 30, 2015 and somewhat manageable debt profile.

AK Steel is expected to be primarily benefiting from the significantly progressing trade cases, enhanced shipments and strategic operating levels, smaller raw material costs particularly, scrap and iron ore costs and thus the company is estimated to deliver superior production and financial results in the near future.

The continuing globally weaker commodity pricing environment is mainly benefiting the steels manufacturer and expanding its cash position, allowing it to make future strategic growth investments while delivering superior shareholder returns.

The planned Dearborn acquisition has added notable flexibility to AK Steel, providing it extra strength and greater size with improved capability to increasingly serve its customers better. This transaction has provided a leadership position to AK Steel in strategic value-added markets that includes automotive. AK Steel has also grown its scale and uniquely developed maintenance and operational flexibility. The steel manufacturer has developed an outstanding cost performance, saving $27 million during the first half of 2015 and it’s expected to be on right track to exceed the cost savings outlook of $25 million during 2015.

The slow but steady improvement in the demand scenario for final goods and services is expected to drive solid long-term profitability for the company with continued high North American light vehicle production, superior U.S. housing demand, impressively growing global light vehicle production and expanding U.S. non-residential construction fixed investments. In addition, AK Steel has also achieved superior cost control with a notable reduction in prospective cash needs.

The strategic Dearborn acquisition has allowed significant financial flexibility to AK Steel with a healthy increase in steel production capacity, adding to the steel production expertise of the company which is expected to increasingly cater to the steadily rising forecasted global steel demand.

Positives to consider

AK Steel reiterated its third quarter of 2015 average selling price at $912 per ton, a decline of 2% from the last quarter. The decline in average selling price is mainly due to weaker carbon steel pricing during the third quarter, somewhat offset by improved selling prices for electrical steel. This significant reduction in carbon steel selling prices for the quarter is expected to be owing to the ongoing elevated levels of wrongly traded, weaker priced overseas steel imports.  The weaker selling prices in carbon spot market along with the greater hot-rolled shipments among the integrated shipments achieved after the successful acquisition of Dearborn Works were the key reasons that led to a 16% fall in the average selling price of the company in the third quarter of 2015 as against the same period last year.

In the third quarter of 2015, AK Steel bought back $12.5 million of remaining senior unsecured notes in classified, spontaneous open market operations and executed settlements of $45.0 million on the AK Steel’s revolving credit facility.

The integration of Dearborn Works with AK Steel has somewhat nullified the impact of the global weaker steel pricing scenario and thus allowed the latter to repurchase the outstanding senior unsecured notes and in line with its continued commitment to deliver impressive shareholder returns.

TheStreet Ratings team rates AK Steel Holding Corp. as a “Sell” with a ratings score of D and primarily driven by some significant weaknesses, which are believed to have a larger impact than any of its key strengths and thus make it difficult for the investors to achieve profitability. The company's major weaknesses are observed in several areas, like its weak earnings per share growth, declining net income, disappointing profit margins and largely poor historical stock price performance.

The consensus estimate among 18 polled investment analysts evaluating AK Steel Holding Corporation suggests investors to “Hold” their position in the company. This consensus rating is maintained since the investment analyst’s sentiments declined on Feb 02, 2012. The earlier consensus estimate suggested that the company will outperform the market.

A majority of the key investment analysts are extremely disappointed about the growth prospects of AK Steel, given a tough global operating environment with weaker commodity pricing and demand as well as feeble company’s financial position.

Conclusion

Overall, the investors are advised to “Hold” their position in AK Steel Holding Corporation looking at the poor company’s growth prospects with PEG ratio of -0.73, depicting no growth but decline. The profit margin of -4.90% indicate no profit but loss. Moreover, AK Steel is debt-burdened with significant total debt of $2.39 billion against weaker total cash position of $90.00 million only, restricting the company to continue with its operations profitably.
Published on Apr 12, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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