Today I effectively doubled my holding in AKS raising my holdings to 50% of target investment.
AK Steel looks good on a number of fronts. One is their major coke supplier, SunCoke, Inc., has settled a lawsuit brought on by the City of Monroe. Also last fall, AK Steel aquired 100% interest in AK Cola Resources, Inc and took a 49% position in Magnetation JV, an iron ore supplier. Essentially AKS has a lot to manage raw material prices and thus input costs.
Clearly AKS has taken a proactive approach toward controlling commodity prices for its steel production.
Other reasons why I like AKS
1. Dividend Yield is 3.28%
2. AKS has reduced funded debt and underfunded pension and health care liabilities. It also has cut its health care and retiree costs, thereby mitigating a sizable cost disadvantage versus other domestic steel rivals.
3. Price to sales ratio is 0.1113 (below industry average and at a near all time low)
4. Credit Suisse has a $10 price target on the stock
5. S&P raised Opinion on AKS stating:
“Our recommendation change is based on valuation. We estimate EPS of $0.52 for ’12 rising to $1.07 for ’13 and retain our 12-month target price of $7.00. Following a recent sharp decline in the price of the stock, we believe that shares of AKS are no longer overvalued, recently trading at about about 12X our EPS estimate for ’12. Long term, we see AKS benefiting from a gradual decline in pension and health care costs, efforts to internally source more of its raw materials, and a more lucrative product mix. With AKS selling below our target price, we would hold the shares.”
6. Demand for steel is growing due to Oil and Gas Drilling Boom – Despite posting some disappointing numbers for the first quarter the Steel Industry remains optimistic for the rest of 2012. The recent boom in drilling in the oil and gas industry, caused by rising oil prices, as well as a rejuvenated demand for vehicles, have been contributing factors for the soaring demand for steel. “We haven’t had this kind of expansion in steel since the 1980s,” said Eric Burkland, the president of the Ohio Manufacturers’ Association.
7. AKS said that it expects to record a profit in the second quarter. AK Steel plans to provide more info in mid-June. AK remains optimistic that business conditions will improve in the second quarter primarily on increased strength in the automotive market.
Related: IRVINE, Calif., May 23, 2012 /PRNewswire via COMTEX/ — Kelley Blue Book www.kbb.com , the leading provider of new car and used car information, projects new-vehicle sales to approach 1.4 million units, or 14.2 million seasonally adjusted annual sales rate (SAAR), in May 2012; a nearly 30 percent year-over-year improvement.
There is some major downside risk on this stock such as lagging demand for their products due to a bad economy. Their European exposure and raw materials costs.