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Does AK Steel’s Low PE Ratio Look Tempting?

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Jun. 10 2019, Updated 10:05 a.m. ET

AK Steel

AK Steel (AKS) has gained 16% this month. However, the stock has fallen 11.1% year-to-date. The stock has an EV-to-EBITDA multiple of 6.2x based on its 2019 consensus EBITDA estimates. While the valuation looks reasonable based on the EV-to-EBITDA multiple, AK Steel’s 2019 PE ratio of 5.0x looks attractive. However, you should read these valuation multiples cautiously.

While AK Steel’s 2019 PE ratio looks attractive, the 2020 multiple doesn’t look as tempting. AK Steel’s low valuation multiples should be seen in the context of its higher leverage ratios. AK Steel’s net debt is ~3x its current market capitalization. The company’s leverage ratios are among the highest in the steel space.

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Bullish drivers

AK Steel expects to expand its EBITDA margins as the proportion of value-add business in its revenues grows. The company also expects annualized savings of $40 million from its strategic actions including the Ashland Works closure. The company has been trying to address the legacy pension issues.

However, there are a few other things to consider. AK Steel would start negotiating its 2020 automotive contracts towards the end of the year. Looking at the recent fall in spot steel prices, the company could see a deterioration in its 2020 average selling prices. Given the elevated iron ore prices, AK Steel could witness higher costs in the coming quarters. While the company hedges its iron ore requirements, the contracts might roll over at higher prices. In the medium to long term, rising US steel capacity, especially on the flat-rolled side, could mean more competition for AK Steel in its automotive sheet business.

On the positive side, a focus on contract sales and value-add products could support AK Steel’s valuation multiples compared to its peers who have a higher exposure to spot and commodity grade products.

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