On Tuesday, AK Steel Holding (NYSE: AKS) joined Allegheny Technologies (NYSE: ATI) on the ignominious list of steel companies unable to capitalize on the tremendous pricing power enjoyed by the industry in recent months.
While AK Steel managed to turn a profit for the first quarter of 2004, that profit arose entirely from its March 31 sale of subsidiary Douglas Dynamics. Absent the windfall, the steel manufacturer would have lost $0.15 a share for the quarter. Granted, that was not as bad as the $0.39 per-share loss the company posted a year ago before the run-up in steel prices, but it is still nothing to be happy about.
As demand for steel skyrocketed around the world, AK Steel was able to grow revenues 15% over the year-ago quarter, raising prices alongside industry players such as Schnitzer (Nasdaq: SCHN), Reliance (NYSE: RS), Steel Technologies (Nasdaq: STTX), and Nucor (Nasdaq: NUE). AK Steel even imposed the kinds of surcharges on its finished steel products that Steel Dynamics (Nasdaq: STLD) and Textron (NYSE: TXT) have reportedly been charging. But none of those efforts were sufficient in bringing the company back into the black this quarter.
CEO James Wainscott commended in a press release "the efforts and renewed focus of the men and women of AK Steel to return this great company to profitability," while hinting strongly that the reason for the red ink is that its employees are getting paid too much.
The company's numbers, however, tell a different story. Sales were up 15% against cost of sales increasing only 12.5%. Overhead costs, which presumably include payroll, dropped almost 12%. Where the company's financials turn from black to red is somewhere between the lines for depreciation expenses (non-cash and so not particularly worrisome) and interest expense from a crushing debt load.
Given the company's mediocre results in an environment where steel prices are strong, steel-maker pricing power is even stronger, and interests rates are at rock bottom, AK Steel shareholders need to take a gut check now. What will happen if the long-awaited Fed interest-rate hike comes? What will happen if the long-predicted slowdown of the steel-hungry Chinese economy arrives? And what disaster awaits them and the company if these two events should arrive simultaneously?
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Fool contributor
Rich Smith
has no interest in any of the companies mentioned in this article.
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