Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Third time's the charm?
For the second time in a week, steelmaker AK Steel (NYSE: AKS  ) is getting a vote of (muted) confidence from Wall Street. Will it be enough to halt the slide in a stock that's lost nearly 50% of its value over the past 12 months? Let's find out.

Yesterday morning, analysts at UBS called a halt to AK Steel's continual slide, apparently reasoning that after AK's been cut in half already, a lot of the risk has been squeezed out of the stock. The analyst's upgrade to "neutral" mirrors a similar upgrade out of Goldman Sachs last week, which argued that now that AK has completed its recapitalization, the company has enough liquidity that "balance sheet concerns have diminished in the near to medium term." In the absence of any more "negative catalysts," the analysts believe it's finally safe to hold the stock.

But they're both wrong.

$588 million here, $588 million there, and...
There's no question that, having successfully sold investors $588 million worth of new stock and bonds last week, AK Steel now has enough cash to avoid going bankrupt in the near term. When CEO James Wainscott boasted last week that "the offerings fortify AK Steel's balance sheet and enhance the company's liquidity and financial flexibility," he wasn't just making stuff up.

Problem is, even $588 million (actually, it will be less after AK's bankers take their cut) may not be enough to keep AK afloat over the longer term.

...pretty soon, you're still running out of money
Why not? Well, consider: Over the past 12 months, AK burned through more than $307 million in negative free cash flow. That right there suggests that if nothing else changes, AK's new money, plus the $50 million or so it had in the bank before the recapitalization, will only be enough to keep the doors open for two years.

And it gets worse. To reduce its cash burn-rate this year, AK had to radically scale back its capital spending program. Over the past five years, the company's averaged more than $200 million in capital investment annually, and never spent less than $100 million. Over the past 12 months, however, it's spent just $94 million. Should AK need to return to more historically "normal" levels of capital spending, its cash will run out even quicker.

Neither a borrower nor a lender be
Meanwhile, AK's carrying around a heavier debt burden than ever. Of the $588 million raised last week, fully $500 million took the form of new debt. Added to the existing debt load, that means AK's now about $1.9 billion in hock -- the heaviest debt load the company has ever carried.

At $1.9 billion, AK's new debt load will be nearly four times the size of the company's own market cap. To put that in perspective, U.S. Steel (NYSE: X  ) carries a bigger debt load ($3.4 billion, net of cash), but since its market cap is $3.1 billion, its debt load is actually quite a bit easier to manage. Likewise, "world's biggest steelmaker" ArcelorMittal (NYSE: MT  ) carries a seemingly monstrous debt load of $23.6 billion (again, net of cash) -- but against a $23.3 billion market cap, Arcelor's arguably even less leveraged than USX.

Mini-mill operator Steel Dynamics (Nasdaq: STLD  ) is less leveraged still -- $2 billion net debt, $2.8 billion market cap -- while Nucor (NYSE: NUE  ) is arguably the best-managed steel operator in the world, carrying a mere $2.2 billion in net debt against a market cap second only to Arcelor's -- $13 billion.

Foolish takeaway
Needless to say, Nucor and Steel Dynamics are both positive free cash flow companies, throwing off significant amounts of cash from their businesses. For that matter, Arcelor has emerged from a rough 2011 to begin generating positive free cash flow again, while USX just finished reporting numbers that show it to be generating cash for the first time since 2008.

But would you care to take a guess at which of these five companies is currently the only one not generating positive free cash flow? The only one still burning cash, and the only one that's been five straight years without a positive free cash flow result? That's right -- it's the steelmaker that that's now faced with the challenge of lugging an industry-worst balance sheet out to do battle with its less-indebted, cash-producing peers. The steelmaker that Goldman and UBS upgraded: AK Steel.

Profiting from our increasingly global economy can be as easy as investing in your own backyard -- so long as you pick the right American companies to invest in. UBS and Goldman Sachs may have made a bad choice, but in our free report on "3 American Companies Set to Dominate the World," we'll tell you which companies are the right ones to buy. Click here to get your free copy before it's gone.

Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

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: 2128579, ~/Articles/ArticleHandler.aspx, 10/26/2016 11:43:14 PM

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...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
AKS $5.50 Up +0.23 +4.36%
AK Steel Holding CAPS Rating: **
MT $6.73 Up +0.01 +0.15%
ArcelorMittal CAPS Rating: ***
NUE $47.34 Up +0.34 +0.72%
Nucor CAPS Rating: *****
STLD $26.58 Up +0.40 +1.53%
Steel Dynamics CAPS Rating: ****
X $20.09 Up +0.62 +3.18%
United States Stee… CAPS Rating: **