Steelmakers on Steroids

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.

Now that you know where I stand, make your voice heard through our Motley Poll, and post your comments below.

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. Ford Motor is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

The Motley Fool has a stainless disclosure policy.


Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 25, 2010, at 4:45 PM, karate1000 wrote:

    I've always had a problem with C4Clunkers and I think in the end it will be regretted. It goes against simple supply and demand logic. We're pushing new cars (steel) into a market already saturated with countless used and repossessed cars (i.e. repofinder.com). Now new cars depreciate faster, more Americans are in debt, and more repossessions are on the horizon. My advice if your buying is to get in and out fast.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1092748, ~/Articles/ArticleHandler.aspx, 9/22/2014 6:36:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement