Markets are apprehensive
As noted previously, AK Steel (AKS) has underperformed most other steel companies like ArcelorMittal (MT) and Nucor (NUE) in 2017. To be sure, AK Steel has been working on a differentiated business model over the last few years. It has cut its exposure to commodity-grade steel products and also lowered its spot sales. The move could help establish the company as a value-added steel play.
Furthermore, by lowering its spot exposure, AK Steel could lower its sensitivity to short-term fluctuations in steel prices. As the company sells most of its steel under contract sales, many of which have annual price resets, its earnings are less sensitive to spot steel prices as compared to U.S. Steel (X). However, looking at AK Steel’s 2017 price action, markets look apprehensive about AK Steel. Let’s see what could be making markets jittery about AK Steel.
- Slowdown in automotive sales: AK Steel gets most of its revenues from the automotive sector. As US car sales have shown signs of moderation, markets seem to have become apprehensive about AK Steel.
- High valuations: AK Steel’s valuation multiples were quite high at the beginning of the year as markets were factoring in a lot of positives including a clampdown on steel imports under the Trump administration.
- High financial leverage: AK Steel’s financial leverage is higher than most other steel stocks’ leverage. As steel market sentiments turned somewhat somber this year, AK Steel has underperformed other steel plays (CLF).
In the coming articles, we’ll look at AK Steel’s outlook. We’ll begin with August car sales data in the next part.