We expect AK Steel Holding's (AKS) cost-reduction efforts and renegotiated higher-priced contracts to prevent excessive margin deterioration in light of higher commodity costs. The company has greater product diversification compared to its peers and is focusing on markets and products that have the greatest long-term potential to succeed. We believe the company will gain from new projects, higher-selling prices, and increased shipment. Hence, we reiterate the Buy rating and raise our six-month target price to $60.00.
In the last three years, AK Steel has lowered its headcount by 26%. As a cost-containment strategy, the company has set up a recycling facility to transform waste materials into feedstock for the blast furnace. Moreover, the company also announced the construction of a new electric arc furnace that will significantly reduce stainless and electrical steel production costs.
In the fourth phase of the electrical steel-making capacity expansion, the management has authorized an investment of approximately $130 million for its plant in Butler, Pennsylvania. This is expected to generate annual savings of $60 million on completion in 2009. With this expansion, AKS's electrical and carbon steel products manufacturing capacity will rise to 1.45 million tons annually. AKS is further expanding the electrical steel capacity by investing $21 million. The expansion is expected to be completed by 2009.
In response to higher raw material cost, the company is hiking prices of its products. It will increase spot market prices for its carbon steel products by $50 per ton effective September 1.
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