We all know the old saw about how a rising tide lifts all boats. Exhibit A? AK Steel (NYSE:AKS). While AK Steel was once a lower-cost producer, bankruptcies in the industry have freed many competitors from past legacy cost burdens, and AK Steel is not nearly so competitive these days in terms of profits per ton. And yet the stock has a healthy glow, partly due to ongoing rumors that the company is a likely buyout target.
This was a challenging quarter for the company, and my impression of it is likewise mixed. Shipments seemed slightly soft, but the average selling prices looked pretty good. Production costs again seemed too high, but weren't quite as bad once you adjust out certain costs. Likewise the impact of the lockout at Middletown -- it led to higher costs, but it could also better earnings, either through a resolution of the lockout or the use of cheaper labor.
Nevertheless, I don't think that outweighs some of the overall problems here. The company has quite high legacy liability obligations and is not as self-sufficient as rival producers like U.S. Steel (NYSE:X) and Mittal (NYSE:MT). What's more, the company has historically gotten a lot of its business from domestic automakers, and I don't think you want to be relying upon General Motors (NYSE:GM) or Ford (NYSE:F) these days (though let's not pretend that these companies have stopped making cars and using steel).
Figuring out why a stock is trading at a given level isn't generally all that worthwhile, though it's a little more interesting in this case. It seems the market has decided that AK Steel isn't likely to stay independent much longer, so it's pushed it up in anticipation of a bid and/or the hope that a better steel environment will give it the flexibility to work out its problems.
Well, I wouldn't be eager to bet on that, and I certainly wouldn't pay a premium for it. Even giving the company numerous benefits of the doubt, it's at least 20% overvalued, by my math. So why would I want to pay more for a company like AK Steel when I could still get Steel Dynamics (NASDAQ:STLD) (or U.S. Steel or Mittal) at discounts to fair values calculated with much less generous assumptions? Heck, if I want to take a flier on a troubled steel company, I'll go buy Wheeling-Pittsburgh (NASDAQ:WPSC) instead.
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Fool contributor Stephen Simpson owns shares of Mittal, but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).
