Despite the recent economic recovery, where steel companies usually do well in as demand for goods normalizes and steel demand picks up, AK Steel (NYSE:AKS) has struggled. It is trading just off lows set during the depths of the economic crisis in 2008 and 2009. Despite the debt and the heavy pension obligations, AK Steel has the potential to increase nearly 10x to over $70 a share, its 2008 highs, if demand for steel picks up.
The company is extremely leveraged to the recovery in steel prices and will probably be one of the top gainers in the group as was seen in the last economic recovery cycle from 2003 to 2008. Furthermore, it is also undervalued based on all metrics as seen below.
With that said, the stock is extremely risky with the after mentioned debt and pension obligations so a downturn in the steel sector can potentially send the company into financial distress. Below is a summary of the valuation measures and top holders of the stock.
Valuation: AK Steel's trailing 5 year valuation metrics suggest that the stock is undervalued as two of the metrics are below their respective 5 year averages. AK Steel's current P/B ratio is 2.4 and it has averaged 3.3 over the past 5 years with a high of 7 and low of 0.9. AK Steel's current P/S ratio is 0.1 and it has averaged 0.4 over the past 5 years with a high of 1 and low of 0.1.
Price Target: The consensus price target for the analysts who follow AK Steel is $11. That is upside of 34% from today's stock price of $8.25 and suggests that the stock is undervalued at these levels. This also suggests that the stock has significant upside and is an attractive opportunity at these levels.
Forward Valuation: AK Steel is currently trading at about $8 a share with analysts expecting EPS of $1.27 next year, an earnings increase of 72% y/y, for a forward P/E ratio of 6.5. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. United States Steel (NYSE:X) is currently trading at about $28 a share with analysts expecting EPS of $3.84 next year, an earnings increase of 36% y/y, for a forward P/E ratio of 7.3.
Nucor (NYSE:NUE) is currently trading at about $43 a share with analysts expecting EPS of $4.03 next year, an earnings increase of 27% y/y, for a forward P/E ratio of 10.8. Commercial Metals (NYSE:CMC) is currently trading at about $14 a share with analysts expecting EPS of $1.74 next year, an earnings increase of 55% y/y, for a forward P/E ratio of 7.9. The mean forward P/E of AK Steel's competitors is 8.6 which suggests that AK Steel is undervalued relative to its publically traded competitors.
Earnings Estimates: AK Steel has beat EPS estimates 1 times in the past 4 quarters. The company's EPS figures have come in between -18 cents and 9 cents from consensus estimates or about -200% to 900% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.
Price Action: AK Steel is down 47% over the past year, underperforming the S&P 500, which is up 3.4%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $8.97 and below its 200 day moving average, which sits at $8.37.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.