AK Steel Versus Peers, Downgrade Against Value (AKS, X, CMC, HSC)

Commodities & Metals

Published: August 1, 2011 12:36 pm

After considering the comments made, it its difficult to tell whether Moody’s recent announcement of a pending downgrade of AK Steel Holding Corporation (NYSE: AKS) is company-specific or motivated by a downbeat view of the steel industry.

We looked at several domestic steel companies of comparable size and find a number of common valuation points with AK Steel. All expect dramatic improvement in year-over-year earnings next year. All companies post puny-to-negative return on equity (ROE) numbers. All boast modest forward price earnings multiples. The other companies 24/7 Wall St. examined for a comparison were United States Steel Corporation (NYSE: X), Commercial Metals Company (NYSE: CMC), Harsco Corporation (NYSE: HSC).

AK Steel Holding Corporation (NYSE: AKS) has a market cap of $1.34 billion and a minus return of equity of 15.2%. Its forward price to earnings multiple is 8.4 and trades at just over 2-times book value. Having closed recently at $12.15, the shares are down more than 34% from their 52-week high. Its 52-week price range is $11.64 to $17.82. Consensus target price for the shares is $16.77.

United States Steel Corporation (NYSE: X) has a market cap of $5.76 billion and a minus return of equity of 3.8%. Its forward price to earnings multiple is 8.6. Having closed recently at $39.99, the shares are down 38.5% from their 52-week high. Its 52-week price range is $39.05 to $63.96. Consensus target price for the shares is $51.85.

Commercial Metals Company (NYSE: CMC) has a market cap of $1.68 billion and a minus return of equity of 0.05%. Its forward price to earnings multiple is close to 9. $14.51, the shares are down 20.5% from their 52-week high. Its 52-week price range is $11.75 to $17.92. Consensus target price for the shares is $17.94.

Harsco Corporation (NYSE: HSC) seems more diversified and it has a market cap of $2.21 billion and a return of equity of 1.4%. Its forward price to earnings multiple is 12.9. Having closed recently at $27.41, the shares are down almost 27% from their 52-week high. Its 52-week price range is $19.35 to $36.33. Consensus target price for the shares is $38.33.

The most telling number among these data is AK Steel’s negative return on equity of 15.2%. It decisively trails the next worst ROE of the lot, minus 3.8% posted by US Steel. Maybe this downgrade is company specific, particularly since AK shares just hit a new 52-week low of $11.64 this morning.

With poor economic data in America and with China and India putting on the brakes in their own countries, there is just very little to get excited about here today.

Jim Berdou

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