Report
Andrew Lane
EUR 850.00 For Business Accounts Only

Morningstar | AK Steel Shares Plummet 9% After 3Q Results Miss Analyst Estimates; Shares Fairly Valued. See Updated Analyst Note from 29 Oct 2018

AK Steel reported third-quarter results that missed lofty investor expectations, sending shares sharply lower. This negative reaction comes despite positive commentary from management that emphasized what it viewed as a positive market environment and noted this was the firm's best third quarter in 10 years. After the recent plunge, shares now hover just above our fair value estimate of $3.75 per share.

Despite the negative reaction from investors, Adjusted EBITDA of $160.8 million was in line with what management had guided, with weak shipment volumes being offset by strength in operating margins. The company reported an adjusted EBITDA margin of 9.3%, up from 7.7% a year earlier. Shipment volumes likewise increased by around 4%.

In the fourth quarter, management expects shipment volumes to remain flat versus the third quarter. Meanwhile, it expects an adjusted EBITDA margin decline of 150 basis points. This commentary affirms our previously made claim that AK Steel would struggle to benefit from the Trump administration’s steel tariff program to the extent that was assumed by investors.

Nevertheless, the prevailing market environment has allowed the U.S. steel industry to benefit from overwhelmingly positive market conditions, with steel prices up significantly this year. Despite this, we expect AK Steel’s adjusted EBITDA margin to be around 8% in 2018, reflecting little to no improvement as compared with margins over the past two years. In the longer term, we expect sluggish demand growth in China to cause margins to contract to just above 5% by 2022. Accordingly, we are skeptical that the company will be able to achieve management’s target of a midcycle return on invested capital of 10.5% and adjusted EBITDA of 8%.
Underlying
AK Steel Holding Corporation

AK Steel Holding is a producer of flat-rolled carbon, stainless and electrical steels products primarily for the automotive, infrastructure and manufacturing, and distributors and converters markets through its wholly-owned subsidiary, AK Steel Corporation. The company's other subsidiaries also provide customer solutions with carbon and stainless steel tubing products, solutions, tool design, hot- and cold-stamped steel components and assemblies. The company sells its carbon steel products mainly to customers in North America, and it sells its electrical and stainless steel products primarily in North America and Europe. The company also produces metallurgical coal through its AK Coal Resources, Inc. subsidiary.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Andrew Lane

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