AK Steel Drops After Underwhelming Analyst View

Shares of steelmaker AK Steel (AKS) are having a rough day after an analyst at Jefferies lowered his rating on shares.

LEVERAGE TO CYCLE MAY UNDERWHELM: Seth Rosenfeld and his team at Jefferies downgraded shares of AK Steel to Hold from Buy in a note this morning. Rosenfeld said he sees the company’s move away from its past reliance on spot sales to longer-term contracts as a long-term positive, but noted “it leaves the company with only limited exposure to current spot price enthusiasm.” Additionally, the auto recovery anticipated may help sales but contract pricing from the car makers may be disappointing, he added.

RAW MATERIAL COST: According to the report, AK Steel saw a relative benefit from “advantageous coal contracts” in 2017 that may not materialize in the current year. Rosenfeld also believes iron ore costs may increase more for AK Steel than some of its peers, as the recent Atlantic pellet premium hike will lead to higher ASP’s for supplier Cleveland-Cliffs (CLF), but higher costs for AK Steel.

VALUATION: According to Jefferies, AK Steel was trading at 6.3 times EV/EBITDA at the time the note was written. That is compared to a historical average of 5.1 times and the sector at 6.5 times. Jefferies said, “Our new $6.50 [price target] implies 6.2x EBITDA.”

PRICE ACTION: Shares of AK Steel are down almost 8% to $6.12 in afternoon trading.

PEERS: Shares of United States Steel (X) and Cleveland-Cliffs are down around 2%, while Steel Dynamics (STLD) is down 1.34%. Nucor (NUE) is down just 0.66% in afternoon trading.