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Why Credit Suisse Double Downgraded AK Steel

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AK Steel

US steel stocks are having a dismal year. Steel stocks’ poor run continued on May 23. U.S. Steel Corporation (X), Cleveland-Cliffs (CLF), and Nucor (NUE) closed down 3.9%, 1.7%, and 2.8%, respectively. Steel stocks’ downward price action should be seen in the context of broader markets, which also closed in the red on May 23. Along with falling markets, downgrades from Credit Suisse hit steel stocks on May 23.

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Credit Suisse downgraded Steel Dynamics (STLD) from “outperform” to “neutral.” The brokerage was even harsher on AK Steel (AKS). Credit Suisse double downgraded the stock from “outperform” to “underperform” and lowered its target price from $3.50 to $1. The fall represents more than 50% downside over AK Steel’s closing price on May 23. U.S. Steel Corporation has also faced a flurry of downgrades this year.

Valuation

While AK Steel stock’s valuation, at least the PE ratio, could appear compelling, it has a huge debt load. As a result, the PE ratio is somewhat redundant. AK Steel’s leverage ratios are the highest among the companies that we’re discussing in this part. The company’s market capitalization is way below its debt burden. To add to AK Steel’s woes, it’s facing intense competition in its core automotive end market from companies like Nucor.

Automotive industry

AK Steel’s automotive contract pricing has disappointed markets for quite some time now. The automotive industry is set to degrow in 2019. The industry reported a yearly fall in sales for two consecutive years, which doesn’t help AK Steel. While the company managed to post better-than-expected earnings in the first quarter, there were some concerning aspects as well. Read Are AK Steel’s Q1 Earnings Worth the Celebration to learn more.

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