AK Steel Holding Corporation (AKS), ArcelorMittal (ADR) (MT): What Could Happen if Things Start to Go Well for Steel?

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AK Steel Holding Corporation (NYSE:AKS)The steel industry has had a rough couple of years, and the share prices of integrated steelmakers certainly reflect this. Some companies have been beaten down more than others, and AK Steel Holding Corporation (NYSE:AKS) has been one of the worst performers in the sector. It could also turn out to be a gold mine for new investors if they successfully turn things around. However, that is a very big if. Let’s take a closer look at why AK Steel Holding Corporation (NYSE:AKS) is doing so poorly, what could happen if things start to go right, and some less-risky alternatives.

AK Steel Holding Corporation (NYSE:AKS) in a nutshell

AK Steel Holding Corporation (NYSE:AKS) was formed by the partnership formed between Armco Steel and Kawasaki Steel (hence, AK) that took place in 1989. The company is an integrated steel producer, whose main products are carbon, stainless, and electrical steels for use in a variety of end markets, a large percentage of which are automotive and construction-related. One of the most well-known products made by AK Steel Holding Corporation (NYSE:AKS) are the crash barriers seen on the side of roads and racetracks, as those are still known as “Armco” barriers in some parts of the world.

Problems and (hopefully) solutions

As mentioned, the two biggest contributors to steel demand (and therefore pricing power) are the automotive and construction industries. Over the past decade or so, U.S. steel consumption has declined by an average rate of 1.9% per year, and worldwide production has increased, especially in China. In fact, a group of steel producers recently told Congress that steel imports from countries that subsidize their steel producers are mainly responsible for the decline of the U.S. steel industry over the past few years.

With China’s recent economic slowdown, there is increased concern about dumping steel into the U.S. market, which could be partially to blame for this year’s nosedive in share prices. I personally believe that these fears are a bit overblown. I’m not saying that it won’t happen. I simply think that our government will be quick to act in regards to this issue. Once something concrete happens to further regulate steel dumping, the industry will breathe a lot easier.

There are a few problems that are unique to AK Steel, as well. First, AK Steel has very high debt levels relative to their peers. The company’s current long-term debt load is three times its entire market cap! Before any real recovery can take place, the company needs a viable plan to address the debt issue. They have already taken steps to reduce their very high retiree and employee healthcare costs, and I would like to see them get the rest of their obligations under control.

The numbers: it’s anyone’s guess!

If AK Steel (and the industry) does manage to return to profitability, as they are projected to do in 2014, they could provide excellent returns to investors willing to take a risk. As I have said before, uncertainty in the markets can create the best opportunities, and it is hard to find an area of the market with more uncertainty than the steel industry. Analysts don’t even know what to make of it. Earnings estimates for this year call for a loss of 39 cents per share, with individual targets ranging from a loss of 65 cents per share to a profit of 9 cents per share. Further out, it is even more of a mystery. In 2015, the estimates range from a low of 38 cents to a high of $1.64 per share. If the actual number turns out anywhere near the high end, AK Steel could become a $20+ stock again easily. In other words, the high estimate implies that AK Steel is currently trading for just over two times 2015’s potential earnings. Bear in mind that if the actual numbers are near the low end, there could be even more pain ahead.

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