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.
The world’s largest steel producer, ArcelorMittal (ADR) (NYSE:MT) is trading at a forward P/E (1yr) of 10.28, and has a dividend yield of 4.30%. Just like AK Steel Holding Corporation (NYSE:AKS), it didn’t have a good 2012. But, as steel prices are expected to recover to some extent, things look better for the steel giant in 2013. According to the sell side, ArcelorMittal has a mean recommendation of 2.3, suggesting that it’s a better buy than AK Steel. You can have a further look at my detailed take on ArcelorMittal here.
Conclusion
In 2013, the driving force behind the steel industry would be China’s growing demand. Last year, Chinese demand for steel took a toll due to a weak global economy. As the global economy starts to move steadily towards recovery, steel prices are also expected to recuperate. The recent auto boom, along with a strong heavy equipment industry, would make sure that steel prices don’t move backward. In addition, low raw materials’ costs would drive the margins up.
In case of AK Steel, a high beta of 1.99 reflects that it’s a hugely cyclical stock. Therefore, it depends to a great degree on the global steel industry. As the steel industry is expected to perform better this year, same is the case with AK Steel Holding Corporation (NYSE:AKS). Though the steel industry is back on track, slow European market and rising imports mean that the industry needs more time before it finally grabs the bull by the horns. As a result, I still remain neutral on AK Steel.
The article Is It Time to Buy This Steel Giant? originally appeared on Fool.com and is written by Waqar Saif.
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