Billionaires Betting On Small Steel: AK Steel (AKS) Versus United States Steel (X)

We see the downward pressure as a possible buying opportunity, where the future turnaround in AK’s operations should help drive earnings growth. The steel stock’s valuation remains low despite a positive earnings outlook. The steel company has managed to meet or beat earnings each of the last four quarters and is expected to have an annual EPS growth rate of 27% over the next five years – the best CAGR of all five steel stocks. One of AK’s initiatives is to invest heavily to internally generate half of its iron ore and coal requirements, with plans to start mining for coal in the first half of 2013. AK Steel is also looking to better penetrate higher margin businesses, including carbon, stainless and electrical steel.

AK trades at only 0.1x sales, compared to US Steel at 0.2x. Assuming AK should trade more in line with the steel giant, given similar debt loads (both with debt-to-asset ratios of 25%) and an expected rebound in profitability, the steel stock could see upwards of 100% upside based on 2013 sales estimates.

What’s holding major competitor Steel Dynamics back is that a big portion of the company’s revenues (40% for the first nine months of 2012) are derived from the struggling rail industry, and not the auto and construction industries. This duo is where the majority (80% for the first nine months of 2012) of AK’s steel products shipped. Steel Dynamics does pay a reasonable dividend at 2.9%, but its valuation – 11x forward earnings – and growth – 8% 5-year expected EPS CAGR – are nothing to get excited about. Billionaire George Soros was selling off his entire stake of Steel Dynamics last quarter (see George Soros’ latest picks).

Ternium, meanwhile, is a Latin American steel company that derives almost 45% of its revenues from outside of North America. ArcelorMittal is another non-U.S. based steel company, but we continue to prefer the U.S. steel companies to these two operators, given that the expected robust steel demand should be driven by the auto and construction markets in North American. Ternium does pay a solid dividend yielding 3.2% and has a cheap valuation at 8x forward earnings, but recent guidance puts operating income for 4Q lower than expected due to lower average prices and higher operating costs. Steve Cohen of SAC Capital sold off his entire stake of Ternium last quarter (check out Steve Cohen’s biggest bets).

ArcelorMittal’s also pays a robust dividend yielding 4.3%, but it has an expensive valuation at 19x forward earnings. Recent news shows the company boosting its already robust ($2.9 billion) cash position with the sale of a $1.1 billion stake in one of its Canadian iron ore mine operators. Ken Griffin – founder of Citadel Investment Group – sold off 90% of his ArcelorMittal shares last quarter (check out Ken Griffin’s new picks).

To recap: AK trades at the very low end of the industry on a P/S basis, but has some of the more robust growth prospects. We see AK as one of the potential big benefactors of a rebound in the steel industry. Read more about other industries you can profit from:

Steel Dynamics: Is This Dividend Stock A Steal?

How to Profit from the Copper Turnaround in 2013

A Deeper Look At Brazil’s Commodity Industry

Disclosure: I have no positions in any of the stocks mentioned above

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Biggest Airports in the World

The 5 Most Gang Infested Cities In America

The 34 Smartest Countries in the World

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!