Stressed Out: 3 Steelmakers That Are Surging on Oil and Metal Price Rallies

 | Feb 22, 2016 | 10:27 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

U.S. steelmakers are in the midst of a terrific month -- and many badly need the recovery.

Three members of Real Money's "Stressed Out" watch list all posted strong gains Monday, following a year in which shares have been getting hammered. Pittsburgh-based U.S. Steel (X) led the charge with a 6% rise in shares, followed by 4% gains in AK Steel (AKS) and TimkenSteel (TMST).

AK Steel, the West Chester, Ohio-based manufacturer, said it is counting on a recovery in steel prices after cheap imports contributed to a $53.5 million net loss in 2015. The company's lack of stable free cash flow is exacerbating concerns around its $2.4 billion debt load, which has become 57% heavier since the end of 2013. 

"While overall market conditions remain challenging, we remain steadfast in our focus on generating respectable returns on our business, both from a selling price and from a cost perspective," CEO Roger Newport said on AK Steel's January earnings call with analysts. "Toward that end, we recently announced two carbon-steel price increases and one stainless-steel price increase. And spot-market prices have indeed begun to rise over the past several weeks. On the contract side of our business, demand in our core market, automotive, remains very strong." Newport pointed to the sixth consecutive year of light-vehicle sales growth in the U.S., which reached an all-time high at 17.5 million vehicles sold.

The DealNewLead Holdings faces perfect storm

Oil shares picked up 6% Monday morning, to $31.40 a barrel, based on U.S. benchmark West Texas Intermediate, while the average price of U.S. imports of cold-rolled coil steel ticked up 1%, to $425 a ton, based on Bloomberg spot-market pricing data.

All three of the companies have considerably high debt-to-earnings ratios, and oil prices have become the go-to barometer for a potential price recovery, since many formerly reliable oil-and-gas customers vanished in 2015, as oil plummeted 30% on the year.

TimkenSteel shares are down 74% over the past 12 months, followed by 65% and 39% declines at U.S. Steel and AK Steel, respectively. Meanwhile the country's largest steelmaker, Nucor (NUE), is trading down 17% over the period.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

Stressed Out: 3-D Printing and Semiconductors Are Getting Slammed

Stressed Out: Why the Big Steelmakers Are Tanking Today

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