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Summary

  • AK Steel should see strong tailwinds in the automotive business that accounts for half of its revenue.
  • AK Steel’s focus on customer satisfaction has been important for its turnaround, and the company expects to keep up the same standards going forward.
  • Low inventory levels at service centers indicate higher demand for AK Steel’s products going forward.

Steelmaker AK Steel (NYSE:AKS) has turned around remarkably in the last one year with shares up more than 100%. However, AK Steel has taken a solid beating so far in 2014 with shares down 16%. Despite reporting good results in its last reported fourth quarter, AK Steel has struggled this year as it experienced operational disruption at its Middletown Works blast furnace. But, AK Steel has managed to pull itself up once again and production is back at full capacity.

So, are there enough reasons for investors to capitalize on the recent pullback in the company's share price and buy some more shares? Let's find out.

Growth drivers

Looking forward, AK Steel is positive about its outlook. The automobile industry, which accounts for 50% of its sales, is going strong. Last year, auto sales in the U.S. were quite strong, with sales hitting 15.6 million units. Now, this year, the forecast is even better as analysts expect sales to hit 16 million units.

As a result, AK Steel expects higher shipments of carbon and stainless steel products in 2014. It is already experiencing solid demand for its autochrome stainless steel products. The future contracts for steel prices, which AK Steel enters into with auto companies, are also about to expire, and AK Steel will use this opportunity to its advantage by increasing steel prices.

Apart from the auto sector, real estate is also showing good signs of growth. Housing activity was strong in 2013, with the industry up around 20%. Economists expect this momentum to continue with another 15% to 20% rise in 2014. And to top that, new housing projects are expected to cross the 1 million mark in 2014 for the first time since 2007. This will lead to increased demand for appliances, HVAC, power generation, etc., and ultimately increase steel demand.

In addition, by the second quarter, AK Steel expects lower steel-making input costs, led by a decline in coal and coke costs. The company expects lower costs for the rest of the year, and this would go a long way in helping the company achieve profitability.

AK Steel is also optimistic as it is seeing low inventory levels at service centers. This is a good sign as low inventory will lead to increased production to meet the demand and replenish the supply chain. Moreover, the company expects to benefit from Magnetation's pellet plant that is scheduled to begin its operations in the fourth quarter of 2014.

Points of concern

However, AK Steel is facing trouble in the electrical segment due to excess capacity, unfairly traded imports, and relatively flat demand. The company is fighting several cases on grain-oriented electrical steel, or GOES products, and non-GOES material against a host of global producers. To its relief, the International Trade Commission has made a preliminary finding in favor of the domestic industry, with respect to material injury. This could be another factor that could positively influence the company's revenue going forward.

However, according to the World Steel Association, global crude steel output slipped in January, with decline across North America and Asia. This can be a concern for AK Steel. The international trade body for the iron and steel industry quoted "crude steel output for 65 reporting nations edged down 0.4% year over year in January to 130 million tons (MT). This compares unfavorably with a 6.3% rise in Dec 2013." But, as mentioned earlier, management believes that a strong auto sector and a rebound in the housing sector will help bring the U.S. steel industry back on track.

Focus on customer satisfaction

AK Steel has made considerable changes to its business to execute its turnaround. It has made remarkable progress on its diversity initiatives, and stood first in overall customer satisfaction among its peers. AK Steel was also awarded for its vertical integration investments in Magnetation and AK Coal. Moves like these have helped AK Steel increase its contract sales, cut costs, and improve margins.

The steelmaker is aggressively focusing on product quality and customer satisfaction. An independent survey of customers, conducted by Jacobson and Associates, showed that AK Steel has the number one position in overall customer satisfaction as compared to its peers. The company is determined to provide the best to its customers in the future as well, and this sets the tone for a positive performance going forward.

Conclusion

At a forward P/E of less than 8, AK Steel is very cheap, despite the stock spiking more than 100% in the last one year. In addition, AK Steel's focus on customer satisfaction, growth in the automotive industry, and cost-cutting initiatives should aid its earnings growth going forward. As such, investors should definitely take a look at the stock with the intention of adding more shares to their portfolio on the recent weakness in the share price.

Source: AK Steel: More Upside In Store After 100% Gains In A Year