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AK Steel (NYSE: AKS ) is a producer of flat-rolled carbon, stainless, and electrical products, and tubular products primarily for the automotive, construction, and energy industries.
Today, let's look at three things investors should be watching regarding AK Steel, as they will provide us better insight into the company.
1. Automotive sales figures
A sluggish sales environment is wreaking havoc on most steel manufacturers, so seeing AK Steel's second-quarter sales dip 14% from the previous year wasn't a surprise at all. The surprise continues to be how strong AK Steel's sales to the auto industry have been.
Through the first seven months of 2012, total car unit sales in the U.S. are up nearly 18%. China's growth may be tapering and Europe's sovereign debt crisis may be unresolved, but automobiles continue to sell, and that's great news for AK Steel, whose flat-rolled carbon and stainless steel is used in cars and trucks.
What investors need to keep their eye on is if the tide turns yet again in the fickle automotive industry. U.S. GDP growth was a tepid 1.5% in the second quarter and weakness in Europe is further threatening automakers' bottom lines. In July, for instance, GM (NYSE: GM ) and Ford (NYSE: F ) both saw a decline in year-over-year unit sales that they universally blamed on weakness in Europe. Understand the auto industry's trends and you're well on your way to understanding a good chunk of AK Steel's business.
2. Pricing power
Pricing power is everything in any business, regardless of sector. If you can't command a premium price for your product relative to your cost basis, you go out of business. AK Steel does have $37.4 million in cash, it recently suspended its dividend in order to save $22 million annually, and has more than $670 million in borrowing capacity, so it's not like the company is struggling to make ends meet, but it's definitely struggling to command top dollar for its steel and tubular products.
Going back to those second-quarter results: AK Steel was only able to pass along a 1% rise in steel prices over the 12-month period. The primary reason for stagnant steel prices relates to weak demand for steel products in the construction sector, which is still on shaky ground. It's also quite plausible that energy companies are strapped for cash, with many converting their plants from being coal-fired to natural-gas-burning.
In order to counter its lack of pricing power, AK Steel is taking an aggressive approach to maintaining its margins and boosting prices for all of its carbon flat-rolled steel prices by $30 per ton. At $1,152 per ton last quarter, this is effectively a 2.6% hike and should be enough to theoretically make the company healthfully profitable assuming customers don't defect to its peers and the economy doesn't significantly weaken. US Steel (NYSE: X ) alluded to strong prices in its second-quarter results in late July, although it also pointed to global weakness eating into its results in the upcoming quarter.
3. AK's unknown businesses
On this week's episode of Did You Know?: Did you know that in addition to being a primary steel producer, AK Steel's subsidiary, AK Coal Resources, owns stakes in metallurgical coal mines on the East Coast? Did you know AK's stake in Magnetation gives it access to iron ore concentrate? Make no mistake about it, AK Steel will first and foremost always be a steel company, but these tangential ventures could pay handsome benefits within a few years.
In October, AK Steel purchased metallurgical coal producer Solar Fuel for $36 million and gained access to its 20 million tons of met-coal. AK plans to spend $60 million over the next few years to get the operation up to speed. Met coal has held up a lot better than thermal coal in terms of pricing over the past year, but that still didn't stop Cliffs Natural Resources (NYSE: CLF ) from reducing its exposure to coal in general by selling some of its met-coal assets in Australia.
AK's joint venture through Magnetation involves building a second plant to expand iron ore production from its current level of 450,000 tons annually to as much as 3.5 million tons by 2016.
Now that you know what to watch for, it should be easier to analyze AK Steel's successes and failures in the future, and hopefully we've given you a competitive investing edge.
If you're still craving even more info on AK Steel, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.
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