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Why Did Wall Street Turn Bearish on AK Steel?

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AK Steel

According to consensus estimates compiled by Thomson Reuters, AK Steel (AKS) has a mean one-year price target of $9.66, representing a 20.6% upside over its closing price on January 7, 2017. In contrast, AK Steel carried a one-year price target of $10.32 on January 23, one day before its earnings release.

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Analysts’ recommendations

Of the 15 analysts surveyed by Thomson Reuters, only three recommended AK Steel stock as a “buy” or equivalent, while two recommended a “strong sell” on the stock. Plus, 65% of analysts recommended a “hold” on the stock.

Some analysts downgraded AK Steel after the company’s 4Q16 earnings release. On January 25, J.P. Morgan downgraded the stock to “neutral” from “overweight” while cutting its one-year price target from $11 to $8.

BMO Capital Markets also cut AK Steel’s price target from $11 to $10 after its 4Q16 earnings release. Both brokerages, especially J.P. Morgan, have been strongly bullish on steel stocks (X) (XME) for quite some time.

Why sentiments turned negative

AK Steel (AKS) reported revenues of $1.42 billion in 4Q16 compared to $1.45 billion in 3Q16 and $1.54 billion in 4Q15. The company reported a yearly as well as a sequential decline in its 4Q16 revenues.

Nucor (NUE) and Steel Dynamics (STLD) each reported a sequential decline in their 4Q16 revenues on lower seasonal shipments and lower steel prices. AK Steel’s 4Q16 EBITDA[1. earnings before interest, tax, depreciation, and tax] also fell on a year-over-year and sequential basis.

Although AK Steel’s 4Q16 earnings were better than expected, the company’s 2017 outlook made some analysts turn bearish on the stock. We’ll discuss this more in the next article.

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