Why Brokerages Seem Apprehensive about AK Steel
On September 12, Morgan Stanley cut AK Steel’s price target from $11 to $7. Overall, AK Steel (AKS) carries a consensus one-year price target of $7.82, which represents a 35.7% upside over its September 12 closing prices. Out of the 13 analysts polled by Thomson Reuters on September 12, two rate AK Steel as a “strong buy” while three analysts have a “buy” rating on AK Steel. The remaining eight analysts rate the stock as a “hold” or some equivalent. In this article, we’ll see what could be making brokerages apprehensive over AK Steel.
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Analysts covering steel stocks seem to be wary of the sector’s outlook. Firstly, the Section 232 imports probe has disappointed markets so far. Not only are the findings delayed compared to what markets were expecting, but the consensus also now seems to be that the findings might not be as harsh as steelmakers (CLF)(NUE) initially expected.
Furthermore, falling US auto sales seem to be weighing heavily on AK Steel stock. The company derives most of its revenues from the automotive sector. ArcelorMittal (MT) is the leading steel supplier to automotive companies. However, some analysts expect car sales to gain momentum in the coming months, as many cars would have to be replaced after the Hurricane Harvey.
AK Steel’s valuation might also be stretched, especially given its high financial leverage and low profit margins. You can read US Steel Valuations: The Plot Thickens for a comparative analysis of steel companies’ valuation.
In the next part of this series, we’ll see how analysts are rating U.S. Steel (X).