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Sprinters and marathon runners employ vastly different techniques and training regimens. Investors banking upon a quick sprint to domestic economic recovery may wish to pace their expectations … and prepare instead for an arduous journey.
Steelmaker AK Steel (NYSE: AKS ) reported its second consecutive profitable quarter Monday, and the decisive 80% differential between earnings of $0.36 per share and the far more muted expectations of analysts sent shares running from Monday's starting gun.
Like modern history's laundry list of doping sprinters, however, AK Steel required a set of stimulative injections to obtain this result. Heavily weighted in the production of value-added products for use in the automotive and appliance industries, AK Steel joins automakers like Ford (NYSE: F ) among the direct beneficiaries of the $3 billion Cash for Clunkers stimulus program. In preparation for the impending $300 million Cash for Appliances program, manufacturers like Whirlpool (NYSE: WHR ) are undoubtedly pumping up their inventories as well.
As we have discovered, steroid use pervades sports culture in ways that could scarcely have been imagined just a decade ago. The same can be said for Washington and Wall Street, where stimulus is the performance-enhancing elixir that must not be overlooked by discerning stock fans. Overall, stimulus efforts have been heavily criticized within the manufacturing sectors, as when Nucor (NYSE: NUE ) CEO Dan DiMicco called it "a welfare package that did nothing to create jobs." As retired dopers will attest, there is a significant distinction between a short-term boost and truly sustainable strength.
Back inside AK Steel's locker room, investors found another quick fix that could impact performance down the road. The company recorded a "significant LIFO credit" during the fourth quarter. As I explained in the case of refiner Calumet Specialty Products (Nasdaq: CLMT ) some time ago, LIFO gains provide an easy one-time boost to operating profits, but often imply corresponding charges and tax implications down the road. Accordingly, AK Steel forecasts flat shipment volumes and rising product prices for the first quarter of 2010, but sees LIFO charges yielding a 45% sequential reduction in operating profit to just $35 per ton (from a LIFO-stimulated $64 per ton).
Without a boost from performance-enhancing injections via government stimulus and quick-fix accounting measures, I suggest that AK Steel's fourth-quarter sprint to profitability will lack the endurance to complete a marathon. Noting a decidedly more cautious tone emerging from competitors like Commercial Metals (NYSE: CMC ) and Steel Dynamics (Nasdaq: STLD ) , I encourage Fools to join the quest for recovery confirmation.
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