What: Shares of manufacturer AK Steel Holding Corporation (NYSE:AKS) jumped as much as 14.8% in early trading Wednesday after being upgraded by an analyst. Shares Settled to an 11% gain at 11:00 a.m. EDT on Wall Street.
So what: The move was driven by analysts at Credit Suisse upgrading the stock all the way from underperform to outperform. They also doubled their price target from $3.50 to $7.00 per share.
The analysts think higher contracted steep prices in 2017 will help the company generate $510 million in free cash flow over the next two years. And a recent equity offering will help the company de-leverage the balance sheet, alleviating liquidity concerns.
Now what: If AK Steel can hit the free cash flow targets Credit Suisse has predicted, it wouldn't be unreasonable to think the stock has a high potential. But this is also a prediction based on the assumption that steel prices will rise, which investors have been hoping for all year. Until we see real progress on the income statement, I'd be wary of the metals business, because macro demand doesn't seem to be picking up, and with the market oversupplied, the long-term price trend isn't working in AK Steel's favor.