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

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Most Expensive Rum Brands in the World

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!