On Monday, AK Steel (AKS), a large American steel-maker, gave earnings guidance of $0.04-$0.06 per share for the second quarter of 2012, about half of the $0.11 the Street was looking for. Total shipments are expected to come in slightly higher on a sequential basis at 1.35 million tons for the second quarter, and the company indicated that its average per-ton selling price was roughly the same as the first quarter of 2012. However, the firm noted that it may have to take an allowance against deferred tax assets, which is captured in the revised forecast. Though we think AK Steel's shares are trading below our estimate of its fair value, we demand a large margin of safety before we would considering allocating capital to any steel company.
Perhaps most telling from the firm's release is that management was unable to give full-year guidance. This speaks to the tremendous amount of uncertainty in construction and industrial production, as the United States real estate market remains challenging and China experiences slowing growth. AK Steel lost $0.11 in the first quarter, and the company hasn't earned money since 2008. So, while the firm disappointed the Street, its outlook for a second-quarter profit is certainly a step in the right direction. However the lack of full-year guidance and a warning regarding a recent deterioration in spot market pricing leave us decidedly on the sidelines.
The entire steel industry has been under pressure since the near-collapse of the global financial system in 2008. Though demand in emerging markets has been reasonably strong, construction in more mature markets like Europe and the United States has been relatively weak. Plus, low-cost foreign producers have eroded the industry's cost structure, and we don't expect this trend to change soon.
Though we think the industry has been deeply discounted by the market, with ArcelorMittal (MT), US Steel (X), and AK Steel trading at large discounts to our fair value estimates, the volatility of iron ore prices (input costs) coupled with supply/demand dynamics and the resulting prospects of overcapacity during the troughs of the economic cycle leave us less excited about the group. Plus, all of these companies have large debt-to-capital ratios, and we think steel is among the most uncertain industries in our coverage universe. AK Steel's recent comments about deteriorating spot market prices represent just one example of the difficulties steel firms face.
Still, we think AK Steel has some value at current levels, but we think both the firm's share price and operating results will be extremely volatile. We're not fans of the group on the basis of their Valuentum Buying Index scores (which considers their intrinsic value), and AK Steel is no exception.