AK Steel Will Outperform Peers And The Sector

Nov.16.11 | About: AK Steel (AKS)

AK Steel (NYSE:AKS) is one of the top metals and mining stocks out there, in our opinion. Along with Freeport McMoRan Copper & Gold (NYSE:FCX), AK Steel is set to outperform the sector as a whole due to positive future copper data. Expect the stock to outperform competitors and continue to rise as metal prices rise.

We’re not the only one’s who are bullish about AK Steel either. Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) have both upgraded the stock from Overweight to Equal-Weight setting a price target of $24 with a Bull Case scenario of $46 per share. While that might seem a little outrageous, we still believe AKS has plenty of potential, and believe a price target of $16-$18 is very doable, a total yield of 60%-80%.

Why do we believe AK Steel is a good bet? Right now AKS is trading at very cheap levels; in fact, across the board metals and mining stocks are very cheap due to past corrections leaving huge potential upside. AKS is leading the way, as we believe future earnings will beat expectations due to rising prices of metals and effective cost cuts. We believe this has been a factor that’s gone unnoticed, as margins have significantly improved in both the company’s iron ore and steel business due to increased demand. As a result, earnings estimated are expected to rise 30% in 2011 and 20%-40% in 2012 and 2013 respectively.

Overall the stock is a buy due to three main factors:

  1. Continued strength and increased earnings power. Many people didn’t notice, but during the economic downturn, AK Steel made significant, sustainable cost cuts and operational improvements. These effective cost cuts helped improve profits by lowering overall costs of business.
  2. AKS new iron ore strategy should pay huge dividends going forward. An iron ore margin squeeze was a major headwind for AKS shares in 2010, and investors remain concerned. We think the company’s tighter product markets enables it to pass iron ore costs through, and new contracts structures will make this generate more new sales.
  3. Finally, I believe the electrical steel market is reaching a bottom point. Electrical steel appeals to be recovering, and past quarters showed strong growth in new orders. This is a good leading indicator on increased sales and volumes all of which will provide higher margins for overall business through the rest of 2011 and deep into 2012.

All in all, AKS is a good buy in our opinion. We expect steel prices to continue to rise after hitting a bottom point this summer. In addition, strong projected earnings will surprise investors leading to huge potential upside and a great position for shares to rise significantly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.