On Sep 17, we issued an updated research report on AK Steel Holding Corporation (AKS). While the steel maker should benefit from strong upward momentum in the automotive market and the recent acquisition of Severstal Dearborn, it is expected to face challenges in the third quarter.

AK Steel posted a narrower loss in second-quarter 2014 on a reported basis on Jul 29. Adjusted earnings beat the Zacks Consensus Estimate. Sales rose on higher shipments and topped expectations.

AK Steel, a Zacks Rank #3 (Hold) stock, is expected to benefit from strength in the automotive market and higher shipment of steel products to automakers. The company gets more than half of its revenues from this market which continues to show strong momentum.

AK Steel’s automotive shipments were at their highest level in seven years in the second quarter. The company is expected to continue to gain automotive market share and should witness solid demand for its carbon and stainless steel products from its automotive customers in the remainder of 2014.

Moreover, the recent acquisition of the Severstal Dearborn plant is expected to boost AK Steel’s future earnings and improve its credit profile and liquidity. The buyout has provided the company an access to highly modernized and upgraded steelmaking equipment and facilities. With the acquisition, AK Steel now expects its annual shipments to exceed 7.5 million tons. The company also envisions costs synergies of around $50 million with roughly $25 million expected to be realized in 2015.

AK Steel is also investing to procure about half of its iron ore and coal requirements internally. It is making good progress with its first coal mine at AK Coal and is ramping up mining volumes. AK Steel is also making a significant progress with its iron ore pellet project at Magnetation. Both these strategic investments are expected to improve AK Steel’s cost structure and strengthen its position in the years ahead.

However, AK Steel’s third-quarter results are expected to be dragged down by unplanned outage at its Ashland Works blast furnace in Kentucky. Outage at the blast furnace will hurt results in the quarter with respect to production, shipments, operating costs and margins.

The outage and the resultant lower-than-normal production levels are expected to affect the company’s third-quarter results by around $25 million. While the Ashland Works blast furnace has returned to operation, it continues to operate at production rates that are below its normal levels.

AK Steel also remains exposed to macroeconomic uncertainties. Oversupply in the steel industry and pricing pressure remain as overhangs.

Other Stocks to Consider

Some other stocks worth considering in the steel space include United States Steel Corp. (X), TimkenSteel Corporation (TMST) and Steel Dynamics Inc. (STLD). While both United States Steel and TimkenSteel hold a Zacks Rank #1 (Strong Buy), Steel Dynamics retains a Zacks Rank #2 (Buy).

Read the Full Research Report on AKS
Read the Full Research Report on STLD
Read the Full Research Report on X
Read the Full Research Report on TMST


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