Steel stocks, including AK Steel Holding Corporation AKS, have been under heavy selling pressure for most of the year but are staging a rebound from their 2017 lows.
The Analyst
Credit Suisse's Curt Woodworth upgraded AK Steel's stock rating from Neutral to Outperform with a price target raised from $6 to $7.
The Thesis
AK Steel boasts several near-term catalysts that make the stock "compelling," Woodworth said in a Monday note. (See Woodworth's track record here.)
First, AK Steel will benefit from an increase of around $30 per ton on its value add sheet in 2018 and $80 per ton on stainless and electrical steel products. This should result in an incremental EBITDA of $180 million in 2018 and comes at a time when investors "overly penalized" the stock for a poor third quarter report, the analyst said.
Second, AK Steel has a "clear leadership position" in value add markets where through-the-cycle margins are strong, the analyst said. The company holds various surcharge mechanisms in place for chrome and electrodes and is hedged for zinc and ore, according to Credit Suisse.
Third, investors will re-rate their views on AK Steel and pay a higher multiple on free cash flow once the contract prices reset and management finalizes financing for its acquisition of Precision Partners, Woodworth said. The stock is trading at a 21 percent free cash flow yield on 2018 numbers, which makes in the "most attractive of any steel company we cover," the analyst said.
Price Action
Shares of AK Steel were trading higher by 5.72 percent at the time of publication, at $4.89.
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