Stressed Out No Longer? AK Steel Rallies on Credit Suisse Upgrade

 | Jun 08, 2016 | 10:37 AM EDT
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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.

Is AK Steel (AKS) ready for a comeback? An analyst team at Credit Suisse sure seems to think so.

Not only did the analysts double their price target on the Ohio-based steelmaker -- to $7 a share from $3.50 -- they also increased their rating on the company to Outperform from Underperform. Shares of AK Steel jumped more than 10% to about $5 this morning.

"We believe AKS has underappreciated spot leverage and should benefit significantly from stronger contract prices in 2017," Curt Woodworth of Credit Suisse wrote Wednesday.

The company earned a spot on Real Money's "Stressed Out" watch list earlier this year due in part to its $2.4 billion debt load. The company's corporate credit was rated B- by S&P Global Ratings in October, placing it below investment grade, but its unsecured notes were downgraded even further into "junk" territory to CCC+ from B-. While S&P cited AK Steel's "strong liquidity position," it acknowledged that the company faced "a challenging price and operating margin environment due mainly to imports."

Since the October ratings action, it appears AK Steel has taken steps to bolster its balance sheet. In April, it announced it was offering 52 million shares of common stock with the proceeds of the sale going toward paying down borrowings under its $1.5 billion revolving credit facility.

"Our previous concerns regarding liquidity have also been alleviated following the recent equity offering and we now expect AKS to be in a strong position to de-lever the balance sheet over the next several years and selectively repurchase longer dated debt at a discount to par value," Woodworth wrote.

Wednesday's ratings move on AK Steel was part of a larger review of the steel industry by Credit Suisse, in which several other companies saw their price targets raised. The bullish sentiment in the industry is due in part to more favorable trade conditions and positive structural changes in the U.S. sheet-metal market.

"The equity market does not appreciate the amount of structural reduction in U.S. supply that has been achieved over the past 18 months," Woodworth wrote. "In addition, we believe the volume benefits from restocking and lower import levels over the next 6 to 12 months should provide a meaningful demand response for U.S.-based production. In our view, these supply-demand delta have only very recently started to move decisively in favor of local producers and thus should sustain a tight flat rolled market through the remainder of 2016."

The investment bank's "top picks" in the steel industry are AK Steel, Steel Dynamics (STLD) and fellow "Stressed Out" company United States Steel (X). Shares of the latter two were up 4.3% and 9.6%, respectively.

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

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Ultra Petroleum Falls as Interest Comes Due

Stressed Out: AK Steel Leads Surging U.S. Steelmakers

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