AK Steel (AKS) has been among the lowest performers among the steel stocks this year. Based on its May 9 closing price, AK Steel has lost 22.6% year-to-date. Among other companies in the steel and iron ore space, Cleveland-Cliffs (CLF) and ArcelorMittal (MT) have respectively gained 12.0% and 8.1% in the year while Nucor (NUE) is trading almost flat for the year.
As we noted previously, some analysts downwardly revised AK Steel’s price target after its 1Q18 earnings release. AK Steel had seen downgrades after its 4Q17 earnings release as well. As in 1Q18, AK Steel had posted better-than-expected earnings in 4Q17. So, why have analysts lowered the stock’s target price? Let’s discuss this in perspective.
Average selling price
AK Steel’s average selling price (or ASP) guidance has disappointed the market for the last few quarters. Despite the sharp gains in spot prices, AK Steel’s ASPs haven’t seen a commensurate rise. Because AK Steel sells most of its steel on a contract basis, its ASP tends to lag the movement in spot prices. After accounting for contract sales, AK Steel’s ASP progression has failed to spark the market.
There is a possibility of an equity raise by AK Steel this year to fund its Precision Partners acquisition. The company initially funded the acquisition with its revolving credit facility, but it intends to finance the acquisition through a mix of debt and equity.
On the positive side, US automobile sales have shown strength recently. As AK Steel obtains most of its revenues from automotive companies, higher car sales bode well for the company.
In the final article of this series, we’ll see how analysts rate U.S. Steel Corporation (X) after its 1Q18 earnings release.