AK Steel Holding Corp. (NYSE: AKS) has been caught between a rock and a hard place in its turnaround efforts. Just when the company looked as though it was recovering, the global economic picture and emerging market picture started to weigh on US companies. That being said, the AK Steel report of $13.5 million in fourth quarter earnings looks better than expected — despite this being down almost 62% from the $35.2 million a year earlier.

As you will see further down, S&P Equity Research also upgraded AK Steel to Strong Buy after the company’s earnings report. Not everything is perfect yet, but it sure appears as though AK Steel is selling its turnaround story to investors.

AK Steel’s earnings per share of $0.07 on a net basis was actually $0.14 per share on an adjusted earnings per share basis. Revenues were up by 36% to $2.0 billion from the prior year’s $1.46 billion, and sales were up from $1.59 billion the prior quarter. Thomson Reuters had estimates at $0.07 per share on an adjusted basis and $1.99 billion in revenues.

What is happening in this turnaround process is that operating costs were higher at the same time that its realized steel prices were lower. Those costs were up 37%, but the realized steel price per ton was down 4% year over year and down 9% sequentially. Still, AK Steel positioned this as its best quarter of the year and it talked up that its results reflect strong market demand for automotive products with lower steelmaking input costs.

For the full year, AK Steel’s loss widened to $96.9 million, or -$0.65 per share, and its annual revenue was $6.51 billion.

Adjusted EBITDA in its fourth quarter rose to $117 million, and the company said that costs were up due to a planned outage at its Ashland Works blast furnace. Also, AK Steel’s liquidity was listed as being approximately $872 million.

The big jump in sales was tied to higher tonnage shipments of steel due to the company’s acquisition of Dearborn Works and to continued strong demand from the automotive market.

Unfortunately, guidance for the first quarter of 2015 will not be available until March. That means that forecasting the annual outlook is nearly impossible at this point without knowing where steel prices will be over the course of the full year. Thomson Reuters has its 2015 consensus earnings estimate at $0.82 per share.

The earnings outlook ahead may seem overly aggressive considering that it values the company at only 5-times forward earnings. The reality is that the range of earnings estimates includes losses and gains much higher.

We earlier noted that S&P Equity Research raised its rating to Strong Buy. This is an analyst upgrade with a caveat. The prior rating was at Hold, and it had recently been raised from Sell prior to Tuesday, but the upgrade came with a $1 lower price target — down to $6 from $7. This is based upon applying a P/E of 7 to the S&P 2015 earnings estimate of $0.85 per share. The prior estimate was $1.16 per share, but the valuation at these prices is incredible if the analyst note turns out to be true. The report said:

We initiate our 2016 EPS estimate at $0.94… We believe AK Steel deserves to trade at a significant discount to its peers, given its highly levered balance sheet. However, we are encouraged by stronger-than-expected synergies from the Dearborn acquisition, lower input costs and energy costs, and a strong auto market (making up 50% of AK’s revenue in 2014) in the current environment of low rates and low gas prices.

Is 7-times earnings cheap enough? It depends upon how you value AK Steel’s peers.

AK Steel shares were at $4.05 prior to the earnings report. Shares were up almost 6% at $4.29 in late-day trading on Tuesday after the earnings report. The stock’s 52-week range is $3.83 to $11.37, and the consensus price target from Thomson Reuters was still listed as being up at $7.22.

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