AK Steel Downgraded - Analyst Blog

According to Associated Press (AP), Standard & Poor's Ratings Services, a credit rating agency, has lowered its outlook on steel producer, AK Steel Holding Corporation (AKS) to "Negative" from its initial “Stable” outlook. Other ratings included a "BB" corporate credit rating that places AK Steel in non-investment grade status, two notches below the investment grade.

Last month, AK Steel reported third quarter 2010 results. The company posted net losses of $59.2 million or 54 cents per share for the third quarter of 2010 in contrast to a net income of $6.2 million or 6 cents in the year-ago quarter. Reported losses were higher than the Zacks Consensus Estimate of a loss of 34 cents. Higher raw material (iron-ore) prices and weak steel selling prices are eroding profits. Higher iron ore prices drove the third quarter operating losses by about $76 million or $52 per ton. The ongoing slowdown has marred prospects in the construction and housing sectors. Revenues and average selling prices are lower, as the U.S. and global markets are in a gradual recovery.

Iron ore pricing concerns have led to a negative outlook for steel manufacturers. Iron ore 2010 benchmark price is an increase of 98.65% over the 2009 benchmark, and is higher than a 65% increase that AK Steel had forecast for the first half and the third quarter of 2010.  AK Steel pays nearly double for iron ore pellets compared with its integrated competitors, including United States Steel Corporation (X), who own their own pellets. AK Steel is also facing weak steel demand. The company is unable to pass on the rising raw material cost to customers through price hikes. Such factors should weigh on the company's profitability in the near term. The ratings agency believes that the company will post weaker results in the next few quarters.

AK Steel foresees a challenging fourth quarter on lower shipments and prices along with higher costs. The company is expecting an 8% to 10% sequential decline in shipments to 1.3 million tons to 1.35 million tons due to higher inventories in the consumer markets and approximately 4% decline in the average selling prices resulting from lower spot market pricing and changes in product mix. Particularly carbon steel products prices are likely to remain under pressure. The company expects to incur operating loss of about $80 per ton in the fourth quarter.

The weak third quarter results coupled with a weaker fourth quarter guidance have lead to a significant downtrend in the Zacks Consensus Estimate for the current quarter and full year 2010.

We are downgrading AK Steel to Underperform from our previous Neutral recommendation and lower our target price to $12.00 from $15.00.  

 
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