AK Steel Earnings Preview

Jul.26.11 | About: AK Steel (AKS)

AK Steel Holding Corporation (NYSE:AKS) announced that it would release its results for the second quarter of 2011 before the market opens on July 26, 2011.

AK Steel reported an EPS of 8 cents compared with 2 cents during the year-ago quarter and striding ahead of the Zacks Consensus Estimate of a loss of a cent. In the upcoming quarter, the Zacks Consensus Estimate for AK Steel is pegged at a profit of $0.50 per share, reflecting an annualized growth of 48.53% of Zacks Consensus.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in three out of the four trailing quarters. AK Steel has an average earnings surprise of 312.28%, with positive surprises in each of the quarters involved.

First Quarter Review

On April 26, 2011, AK Steel Holding announced its first-quarter 2011 results. The company posted an EPS of 8 cents compared with 2 cents during the year-ago quarter and striding ahead of the Zacks Consensus Estimate of a loss of a cent.

Net sales as reported by the company were $1,581.1 million on the shipments of 1,423,100 tons versus $ 1,405.7 million and 1,385,800 tons in the prior-year quarter. However, AK Steel missed the Zacks Estimate of $1,609 million. The improvement in the shipments was mainly due to higher pricing, which increased 9% on a year-over-year basis to $1,109 per ton.

Value-added shipments including stainless/electrical, Cold-rolled and Tubular product increased to 224.4, 344.8 and 34.2 tons, respectively, compared with 212.1, 281.8 and 28.7 tons, respectively, in the year-earlier quarter. However, shipments of coated product came down to 621.8 tons from 635.2 tons in the year-ago quarter.

Non value-added shipments including Hot-rolled decreased to 161.1 tons from 193.7 tons in the year-earlier quarter. On the contrary, non value-added shipments including secondary products increased to 36.8 tons from 34.3 tons in the prior-year quarter.

Cash and cash equivalents reduced to $54.1 million as of March 31, 2011 versus $216.8 million as of December 31, 2011. Long-term debt of the company decreased marginally to $650.5 as of March 31, 2011 versus $650.6 million as of December 31, 2011.

The debt-to-capitalization ratio of the company stood at 51% as of March 2011 versus 50.2% as of December 31, 2010 and 38.4% as of September 30 2010.

Cash from operating activities was an outflow of $197.4 million compared with an outflow of $107.2 million at the end of first quarter of fiscal 2011.

According to management, shipments in the second quarter of fiscal 2011 are expected in the range of 1,500,000 and 1,550,000 tons, indicating a strong increase over the first quarter shipments. The company also anticipates that its average per-ton selling price would be 7% higher compared with the first quarter. The operating profit is expected to be approximately $65 per ton for the second quarter of fiscal 2011.

Agreement of Estimate Revisions

Out of the 12 analysts covering the stock for the second quarter of fiscal 2011, none of the analysts revised the estimates in the last 30 days. Similarly, for fiscal year 2011, out of the 12 analysts covering the stock, none of the analysts revised estimates in the last 30 days.

Magnitude of Estimate Revisions

The second-quarter 2011 estimate was flat at $0.50 in the last 7 days, whereas it decreased by 1 cent, from $0.51 to $0.50 in the last 30 days. For fiscal year 2011, earnings estimate was flat at $1.21 in the last 7 days, whereas it decreased by 3 cents, from $1.24 to $1.21 in the last 30 days.

Our Take

AK Steel is uniquely positioned to focus on products with high margins. Electrical steel continues to be the company’s strongest product line, with demand recovering in the U.S. and abroad, though at a slower rate. AK Steel is operating its plants at above 80% capacity and is well positioned to serve the end markets when the demand rebounds.

However, higher input costs, particularly iron ore, is eroding margins of the company. Iron ore pricing concerns have led to a negative outlook for steel manufacturers.

Ohio-based AK Steel Holding Corporation is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products. It operates 7 steel-making and finishing plants in Ohio, Pennsylvania, Indiana and Kentucky.

The basic raw materials required for the steel manufacturing are iron ore, coal, coke, chrome, nickel, silicon, manganese, zinc, limestone, and carbon and stainless steel scrap. Natural gas, electricity and oxygen are the sources of power for steel manufacturing operations. AK Steel competes with companies like Nucor Corporation Common Stock (NYSE:NUE) and Steel Dynamics Inc. (NASDAQ:STLD).

Currently, AK Steel has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6 months and higher) Neutral recommendation.