On Thursday, September 6, analysts at Longbow Research upgraded shares of AK Steel Holding Corp (AKS). The firm raised its rating on the stock from a Neutral to a Buy and set a $8.00/share price target. That said, an analyst upgrade can mean great things for a stock, but in the wake of AKS's upgrade, I wanted to highlight some of the negative catalysts behind my decision to avoid a position in the company.
AK Steel, based in West Chester, Ohio, through its subsidiaries, produces flat-rolled carbon, stainless and electrical steels, and tubular products in the United States and internationally. It manufactures flat-rolled carbon steels, including coated, cold-rolled, and hot-rolled products; and specialty stainless and electrical steels in sheet and strip forms. The company is also engages in finishing flat-rolled carbon and stainless steel into welded steel tubing used in the automotive, large truck, and construction markets, as well as trading steel and steel products and other materials in Europe. It sells flat-rolled carbon steel products primarily to automotive manufacturers; and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold rolled, and hot rolled carbon steel products to distributors, service centers, and converters.
In my opinion, the larger the profit or operating margin, the more attractive the company, and the smaller the profit margin or operating margin, the more potential investors should be wary of a position in the company. In the last 12 months, AKS has demonstrated a negative profit margin of -15.20% and an operating margin of just 0.65%, which was outpaced by both Nucor Corporation (NUE) and Steel Dynamics, Inc. (STLD), by a fairly wide margin. It should be noted that NUE posted a profit margin of 2.84% and an operating margin of 5.71% and STLD posted a profit margin of 2.10% and an operating margin of 5.32% over the last 12 months.
Comparable EPS Trends
Although, AKS has demonstrated an upward trend in terms of EPS over the past year, the company's results concern me, especially when compared to some of the companies within the metals sector. In the last 12 months, AKS's earnings missed estimates by an average of -32.7%, whereas the EPS results of both NUE and Southern Copper Corporation (SCCO) surpassed estimates by an average of 10.775% and 6.625%, respectively.
Although AKS, in my opinion, is one of the better companies within the metals sector, the company still has a way to go before I initiate a position. Do I think AKS' latest price increase with regard to stainless steel assists in enhancing the company's bottom line? Of course I do, but the increase of $0.02/pound is a bit light in my opinion, and a second increase of $0.01/pound - $0.02/pound would be necessary before I establish a position.
From a fundamental perspective I'd avoid AKS until the company's EPS trends and margins pick up a bit more, the numbers at current levels aren't very attractive and at this point there are much better options to consider from a numbers perspective.