What Happened?
AK Steel Holding Corp shares (NYSE: AKS) fell by more than 23% in January. The decline basically started from day one of the new year, following along with other steel companies like Nucor Corp (NYSE: NUE) and United States Steel (NYSE: X), but AK Steel's performance took a turn for the worse on January 24th when it reported earnings.
By the end of the month, AK Steel's stock had plummeted over 20%, while notable peers were only down in the low- to mid-single digits. ArcelorMittal (NYSE: MT) actually managed to eke out a small gain of nearly 4%.
Image source: AK Steel Holding Corp.
So What?
There were two headwinds facing AK Steel in January. The first was the company's 68% gain following the U.S. presidential elections. Donald Trump took a tough line during the election on trade, and was promoting construction spending. Since low-cost imports and flagging demand have been a big issue for the steel industry, investors got excited about steel stocks, in general, when Trump won.
After such a large price advance, however, investors appeared to start the new year rightly questioning just how much steel would benefit from a Trump presidency. The entire steel group was hit by this sentiment shift.
Then AK Steel reported earnings, and its stock materially underperformed its peers. The company lost money in the fourth quarter and for the full year, extending the red ink to eight consecutive years. Although there were some positives, like improved pricing and a smaller loss compared to 2015, there were still a lot of negatives, like reduced sales volumes.
The balance sheet remains fairly troubled even after the steel company issued $600 million worth of stock to help pay down debt. For example, although AK Steel reduced long-term debt by nearly 23% last year, long-term debt still made up over 100% of the company's capital structure because shareholder equity was negative. Even if you include non-controlling interests in that figure, looking at total equity, debt still makes up over 95% of the capital structure. These are improved numbers, but far from good.
Now What?
AK Steel is one of the more troubled domestic steel mills. It's working hard to get itself back on track, but it still has more work to do before it gets there.
The enthusiasm following Trump's election lifted all boats. But it looks increasingly like investors are starting to become more discerning. If you're looking for a steel company, you have better options than AK Steel.
