AK Steel: Perfect Storm Pushes Shares To New Lows

Dec. 11, 2018 2:19 AM ETAK Steel Holding Corporation (AKS)12 Comments
Vladimir Zernov profile picture
Vladimir Zernov
16.12K Followers

Summary

  • AK Steel shares continue to fall.
  • There are many reasons for the negative sentiment, but the company's valuation remains compelling even as earnings estimates are being revised to the downside.
  • Year-end selling could put some more pressure, but the stock has its place on the list of rebound candidates for the beginning of 2019.

When I was writing that AK Steel (NYSE:AKS) shares “will be in the penalty box until the next earnings release” back at the end of October, I was rather skeptical about the short-term perspectives of the company’s stock, but I surely did not envision the magnitude of the downside that followed:

AK Steel stock faced a perfect storm. Of course, missing Q3 earnings expectations and presenting disappointing Q4 guidance was already a problem for the company’s shares. This was exacerbated by volatility in the general stock market, U.S. – China trade war, correction in spot steel prices, Steel Dynamics' (STLD) decision to add more to U.S. supply and general distrust towards many steel names.

As a result, AK Steel now trades at less than 4 forward P/E. The same valuation is “enjoyed” by U.S. Steel (X). Steel Dynamics, which was typically perceived by the market as a better managed company, gets a valuation of less than 7 forward P/E in today’s market. Can it get any cheaper?

AK Steel earnings estimates. Source: Yahoo Finance

The current valuation implies that earnings estimates will continue to drop – otherwise, there is no rational reason why a company can be valued so cheaply. Also, such valuations often imply liquidity problems. In AK Steel’s case, the company does carry a notable debt load of $2 billion, but the near-term maturity schedule does not present significant problems:

Source: 3Q 2018 10-Q report

Given the fact that the company generated $250 million of operating cash flow in the first nine months of this year in what is widely considered as a disappointing performance, I do not see any serious concerns for the company’s financial health in the near term.

Here are a few practical implications that I see:

  1. AK Steel is in no near-term visible financial

This article was written by

Vladimir Zernov profile picture
16.12K Followers
I'm a trader who trades both short-term and long-term. I started my career as a day-trader for a trading firm, but then turned to longer time frames and went on my own to manage my portfolio. I use technical analysis as well as fundamental analysis in my research.

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

Additional disclosure: I may trade any of the above-mentioned stocks.

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