Large declines in the price of a stock can often be part of a larger movement in an overall sector. This is evident when you see multiple companies in the same industry all declining at the same time - even if their "news" is different. This can provide an opportunity to investors if they are able to find a company within the sector with a price that has declined further than it should have.
As global demand for steel products increases, it should be expected that producers should all be doing amazingly well, but these great results are tempered by the environment in which they currently reside. Rising energy and raw material costs make it increasingly expensive to produce steel products, and although big industrial demand may continue to increase, the demand for many consumer products such as automobiles has slowed.
Lets take a closer look at one of these bears to see if we can find a company that doesn't deserve its fall.
| Company |
One Month Loss* |
Market Capitalization
|
|
AK Steel
(NYSE:AKS)
|
25.3% |
$5 billion
|
|
Mechel OAO
(NYSE:MTL)
|
19.9%
|
$16 billion
|
|
Nucor
(NYSE:NUE)
|
19.2%
|
$17 billion
|
Commercial Metals
(NYSE:CMC) |
18.4%
|
$3 billion
|
|
ArcelorMittal
(NYSE:MT)
|
18.0%
|
$114 billion
|
|
US Steel
(NYSE:X)
|
17.7% |
$17 billion |
| Data as of market close July 21, 2008 |
Is AK Steel a Steal?
As of market close Monday, AK Steel (NYSE:AKS) was down 25% for the month. As of the time of writing, during intraday trading on Tuesday July 22, it is down another 4% as selling continues to push down the share price of this company. These declines seem like a good opportunity to by AK Steel on the cheap, as financially, the company is very impressive.
Just this morning, AK Steel surprised the Street by beating Q2 EPS estimates of $1.13 per share with earnings of $1.29 per share. These profits came on record revenue of $2.24 billion compared to the Q2, 2007 revenue of $1.87 billion. This extra profit seems to be one of the reasons that AK Steel will be able to make early pension fund contributions. The board announced this morning that the company will be contributing $75 million into its pension trust fund, to reduce future funding requirements. Along with the announcement of these early contributions, the company also declared a quarterly dividend of 5 cents per share.
It seems that the price of AK Steel has been falling because investors are paying more attention to its guidance for Q3, rather than its stellar performance this quarter. The company announced this morning that Q3 shipments will decrease, primarily due to lower automotive shipments, and its costs (raw materials and energy) are sure to continue to increase. (To explore the controversies surrounding companies commenting on their forward looking expectations, read Can Earnings Guidance Accurately Predict The Future?)
Going forward, I like AK Steel's prospects. Even if business does slow, AK Steel has been growing at record levels over the past year, so it definitely has a cushion. True, energy and raw material costs are increasing, but the company expects its end product to sell for more as well. The company reported that it expects to generate an operating profit of over $170 per ton, which would be a new record.
With current declines in the sector as a whole, and in AK Steel in particular, investors are able to purchase shares in this company for prices well off of its 52 week high of over $70. As countries across the global become more and more industrialized, demand for steel products will increase. That makes companies like AK Steel good long-term plays. (To learn more, check out Ten Tips For The Successful Long-Term Investor.)
Add Your Two Cents
What do you think will happen with AK Steel going forward? Will increased revenue and profit be enough to push the stock up to new highs? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.