AK Steel: Positive Momentum Continues

| About: AK Steel (AKS)


AK Steel reported Q2 results.

Earnings rise to $0.08 per share.

Short squeeze and momentum buying continue.

I took a look at AK Steel's (NYSE: AKS) second-quarter results as part of my preparation for Cliffs Natural Resources' (NYSE: CLF) second-quarter results. Here's what I found.

Not surprisingly, the recent surge in steel prices did help AK Steel in many ways. The average selling price increased to $957 per ton in the second quarter compared to $914 per ton in the first quarter. Revenue was down slightly from $1.518 billion to $1.492 billion as shipments decreased by 6%.

Earnings changed from a loss of $0.08 per share in the first quarter to income of $0.08 per share in the second quarter. All in all, the headline story "steel market is getting better" is really true - steel market is getting better and you can see it in the report of a steel producer.

Even more importantly, the change of direction in the steel market enabled AK Steel to do two important things. First, the company was able to raise $249.4 million (net proceeds) through a share offering without damaging the momentum of the share price.

Second, AK Steel was able to issue $380 million of 7.50% senior secured notes due 2023 and get rid of 2018 maturity. Third, the company was able to repay $370 million of borrowing under the credit facility and reduce debt to $2.07 billion.

These are important steps and AK Steel should continue to deal with its indebtedness while the market is favorable. I find the 7.50% interest rate on AK Steel's bonds reasonable. The stock market is always ahead of the economic reality, so the actual improvement in AK Steel's results is less impressive than the improvement of its share price, which briefly traded below $2.00 at the beginning of this year.

At the same time, companies in more troubled industries get worse rates for their bonds. Transocean (NYSE: RIG), an offshore driller, has recently got a 9% interest rate on its bonds due 2023. As for the timing of the share offering, a company can never get the absolute best price. Equity offerings are better done when the company's shares are in the uptrend rather than downtrend, and that's exactly what we saw in AK Steel's case.

This year has been pivotal both for AK Steel's results and the price of its stock. The stock market is near all-time highs, many stocks have been clearly overbought and their valuations have been pushed far beyond reasonable limits.

In this light, investors who are not willing to pay exorbitant prices for previous high-flyers are pulling their money in viable turnaround stories like steel. Add significant short float in the steel names to the mix and you get the big picture - steel stocks are soaring, pushed by the fear of missing out trade and unsuccessful shorts running for cover.

Things are really looking better for the U.S. steel market after protective tariffs have been imposed, but there's a danger to get sucked into the rally at wrong prices. Those who already have a long position in AK Steel's shares have little to worry about, but newcomers should be cautious. The stock has still room to go in terms of forward P/E, especially as the E is rising, but short squeeze - led trades are often bumpy and one might expect sizable pullbacks.

As far as my bet on the U.S. steel market through Cliffs Natural Resources goes, I'm satisfied with what I saw in AK Steel's report. The positive momentum for steel names continues and fundamental changes back this momentum. Those without positions in the space will likely be better off waiting for a pullback to get in.

Disclosure: I am/we are long CLF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Steel & Iron, Earnings
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