Not Bullish on Steel

 | Dec 06, 2012 | 10:30 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

aks

According to a filing with the Securities and Exchange Commission (SEC) Richard Abdoo, a board member at AK Steel (AKS), has purchased 12,500 shares of the company's stock at an average price of $3.95 per share. Abdoo had previously owned a little over 100,000 shares directly. His purchase also comes on the heels of a number of insider purchases in late November, generally at prices just under $4 per share.

The steel industry has been in a rut (AK's stock price is down 54%, year-to-date) as a relatively weak macro environment (particularly in Europe, though Chinese growth has been disappointing as well) has reduced demand. AK's beta is 2.1, signifying how reactive the stock price is to the broader market. We've also seen some insider activity in coal recently: While thermal coal is driven by demand from utilities, metallurgical coal is a key input to steel production. Taken together, it's possible that company insiders are seeing a strengthening global economy and therefore a better business environment.

Revenue was down 8% in the third quarter compared to the same period in 2011, primarily due to lower prices. Since production did not change much, AK Steel did not reduce costs in line with the lower sales, and so it reported an operating loss (something it had avoided in the first half of 2012). With higher interest expenses than a year ago as well, the company's pretax losses for the quarter came in at $29 million as opposed to $7 million in the third quarter of 2011. This also pulled pretax income negative for the year. Cash flow from operations was negative in the first nine months of 2012, forcing AK Steel to borrow money.

The sell-side expects the company to post earnings per share (EPS) of $0.17 in 2013, which implies a forward price-to-earnings ratio (P/E) of 24. Since the company is currently in the red, it appears that analysts are counting on improvements next year. Given that a forward P/E of 24 generally suggests a growth company, we think that investors may be even more bullish. The most recent data show that nearly a third of AK Steel's outstanding shares are held short. We can see why a value trader would take that line: The stock seems to have quite a bit of improvement priced in.

If we were going to take insider activity as a good sign for steel, and for the global economy in general, AK Steel might not be the best buy. U.S. Steel (X), Nucor (NUE) and Steel Dynamics (STLD) are three larger steel companies. If we take Wall Street analyst estimates at face value, these three companies are all considerably cheaper in terms of their forward earnings as their P/Es are in the 10-14 range. Of course, this is because these firms are also expected to have much higher earnings next year, so they aren't necessarily good values. If an investor wants to piece together a long steel thesis, however, it seems like it would be a better idea to play it through one of these peers unless there is some company-specific factor at work that would lead AK Steel to benefit more from an improved market than these larger companies.

Are we bullish on steel? Not particularly, and investors who expect macro numbers to surprise going forward might be better off buying a company such as Caterpillar (CAT). We do think that it's a good idea to keep the insider optimism in mind, however, and would certainly not join the shorts in AK Steel.

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.