AK Steel remains unattractive
The producer is trying to combat poor conditions by boosting prices.
By Zacks Equity Research
AK Steel (AKS) has not had a good year so far. It turned in a loss in the first quarter, issued a muted guidance for the second quarter, had its rating slashed by Standard and Poor's recently, and its stock has lost one-fourth of its value. To counter this negativity, the company has decided to implement a price increase.
AK Steel is increasing the current spot market base prices by $40 per ton for all its carbon flat-rolled steel products. The revised prices are already in effect, and all new orders will be charged at the new price.
The company had the luxury of improved pricing in the first quarter, as average selling price rose 6% sequentially and 3% year over year. However, AK Steel will not see the benefits of rising prices in this quarter if we are to go by the issued guidance.
AK Steel had attributed its disappointing guidance for the second quarter to macroeconomic weakness and falling spot prices. Its prospects might be jeopardized further due to increasing imports in the domestic markets along with industry oversupply due to ramping up of operations by other steelmakers. This would probably lead to further deterioration in prices and hurt margins.
In addition, weakness in the construction and housing sectors, a high fixed cost structure and sluggish growth in Asian markets are factors that might have a negative bearing on AK Steel's performance. Moreover, uncertainties out of Europe and considerable pension fund requirements are additional hurdles for AK Steel.
We currently have a long-term "underperform" recommendation on AK Steel. The company, which competes with Nucor (NUE), U.S. Steel (X) and Steel Dynamics (STLD), holds a short-term Zacks #5 Rank ("strong sell").
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