uploads/2019/07/AK-Steel-Q2-earnings.jpeg

AK Steel’s Q2 Earnings: Are the Estimates Aggressive?

By

Updated

  • AK Steel’s Q2 earnings are scheduled for July 29.
  • The stock has bounced back sharply after hitting a 52-week low in May.

AK Steel’s Q2 earnings

AK Steel’s Q2 earnings are expected on July 29 after the markets close. The company will likely hold its earnings call on July 30. U.S. Steel’s Corporation’s (X) second-quarter earnings are expected on August 1. So far, Nucor (NUE) and Steel Dynamics (STLD) have reported their second-quarter results. Both of the companies missed the earnings estimates in the second quarter. However, Nucor and Steel Dynamics sounded positive about the steel pricing environment. US steel companies have announced three rounds of price hikes over the last month. There has been some traction in US steel prices since the price hikes.

AK Steel’s Q2 earnings estimates

The analysts polled by Thomson Reuters expect AK Steel (AKS) to post revenues of $1.74 billion in the second quarter. The company posted revenues of $1.69 billion in the first quarter and $1.75 billion in the second quarter of 2018. AK Steel’s second-quarter revenue estimates look aggressive. US steel prices fell in the second quarter. The automotive industry, AK Steel’s core end market, was still weak in the second quarter. During the first-quarter earnings call, AK Steel said that the automotive industry “makes up 70-plus percent of our business.” AK Steel missed the revenue estimates for the last three quarters.

EBITDA estimates

Looking at AK Steel’s second-quarter estimates, it will likely post an adjusted EBITDA of $108. In contrast, the company posted an adjusted EBITDA of $161 million in the first quarter and $148 million in the second quarter of 2018. While AK Steel’s first-quarter EBITDA was better than expected, it was largely due to some one-time items. AK Steel reported a mark to market gain of $21.8 million on its iron ore derivative contracts in the first quarter. The company also recorded an $11.6 million gain on asset sales in the first quarter. AK Steel’s EBITDA estimates might be conservative. Falling spot steel prices might not have a big impact on the company’s second-quarter earnings. The company’s high exposure to contract sales might cushion the impact of lower spot steel prices.

Expectations from the earnings call

During AK Steel’s second-quarter earnings call, markets would also look for its 2019 guidance. U.S. Steel Corporation, Nucor, and Steel Dynamics provide quarterly guidance. However, AK Steel provides annual guidance during its earnings release. In the first quarter, AK Steel lowered its 2019 EBITDA guidance. Although a bit early, markets would look for cues on AK Steel’s 2020 automotive contracts. The company sells most of its steel to contract customers. Usually, the company seals the contracts. The big fall in US steel prices will likely take a toll on AK Steel’s 2020 contract pricing. Having said that, we’ve seen some uptick in US steel prices in July. AK Steel hedges its iron ore requirements. However, the sharp rise in iron ore prices might mean that the company would roll over its iron ore hedges at higher prices.

Analysts’ recommendations

Analysts have been quite bearish on AK Steel this year. Among the analysts polled by Thomson Reuters on Thursday, one recommended a “buy,” nine recommended a “hold,” and four recommended a “sell.” AK Steel’s mean consensus target price of $1.92 implies a potential downside of almost 26% over its closing prices on Wednesday. Analysts might have to rethink their ratings after AK Steel’s second-quarter earnings.

More From Market Realist