AK Steel Holding Corporation (AKS), Steel Dynamics, Inc. (STLD): Is It Time to Buy This Steel Giant?

Founded in 1899 in Ohio, United States, AK Steel Holding Corporation (NYSE:AKS), engages in production of carbon, stainless/electrical sheets, cold rolled and aluminum coated stainless steel.

Low steel prices were the main reason behind AK Steel Holding Corporation (NYSE:AKS)’s lackluster performance in 2012. Given the fact that the global economy is expected to do slightly better this year, the big question is, what should you expect from AK Steel Holding Corporation (NYSE:AKS) in 2013?

Quarterly earnings

In 4Q’12, the company posted a loss of $230.4 million, or $1.89 a share, versus a loss of $193.9 million, or $1.76 per share, in the same quarter last year. Revenue went down 6% to $1.42 billion. Operating costs stood at $6.06 million.

Lesser demand in Europe and a sluggish Chinese economy drove steel prices down, which had a negative impact on the company’s earnings.

In the next quarter, analysts expect AK Steel to report a loss of $0.08 per share on revenue of $1.46 billion. For the full year, analysts’ estimates stand at $0.05 a share on $5.95 billion revenue.

Going forward

According to the World Steel Association, global steel demand is expected to grow 3.2% this year. The world’s largest steel producer and consumer, China, will be the primary driver behind this increase. Automotive, heavy equipment, and energy sectors are showing signs of progress and pushing up steel prices. An improving construction sector will lend further impetus to steel demand. Having said this, rising imports in the U.S. still remain a worry for the local steel industry.

Thanks to low costs of coal and iron ore, operating costs are expected to remain low in 2013. In case of AK Steel, the company expects its raw materials and energy costs to go down by $150 million this year.

Valuation

AK Steel Holding Corporation (NYSE:AKS) is trading at a low forward P/E (1yr) of 7.57, showing that investors aren’t expecting that much from the company in the near future. A meager operating margin of 0.49%, and a negative EPS (ttm) of $9.06 show that the company hasn’t been able to generate any profit on its sales. A mean recommendation of 2.9 on the sell side depicts that AK Steel isn’t an attractive buy in the steel industry.

Steel industry’s major players

On the other hand, Steel Dynamics, Inc. (NASDAQ:STLD) is trading at a forward P/E (1yr) of 9.19 and has a PEG of 0.86. Incorporating a dividend yield of 2.80% into its PEG, we get to a PEGY of 0.77. This low PEGY makes Steel Dynamics an undervalued stock having significant upside potential. Using earnings estimates, I value it at $17. Hence, it has an upside potential of almost 12%, making it an attractive buy. My comprehensive analysis on Steel Dynamics, Inc. (NASDAQ:STLD) can be found here.