Earnings preview: High raw material costs a concern for AK Steel in Q1

When steel manufacturer AK Steel Holding Corp. (Nasdaq: AKS) reports results for the first quarter of 2019 on Monday after the closing bell, the general perception is that earnings will increase sharply to $0.13 per share – 44%, to be precise. The estimate for revenue is $1.74 billion, up 5% from the first quarter of 2018.

The recent spike in iron ore prices could be a challenge for the company, which procures the raw material from third parties. Investors will be closely following the earnings event and conference call for updates on the management’s strategy for the year, in the light of the price hike.

The majority of the analysts have given the company’s stock hold rating, apparently taking a cue from its low price. Moreover, there is uncertainty as to how the stock will perform after the earnings report, for the company has not been consistent in beating estimates in the past. Though the consensus target price of $2.90 is slightly above the current levels, it is far below the long-term average.

The recent spike in iron ore prices could be a challenge for the company, which procures the raw material from third parties

To a certain extent, the lackluster performance of AK Steel in the recent quarters can be attributed to the weakness in the US automotive industry, which accounts for most of its clientele. Meanwhile, for the company and its peers in the steel industry, capacity expansion is the key to taking advantage of the curbs imposed by the government on steel imports, especially from China.

In the December quarter, the company turned to a profit of $0.16 per share from a loss in the year-ago quarter, supported by a 12% increase in sales.  While releasing the report, the management had revealed plans to make major capital investments this year, including growth-oriented investments for the Precision Partners and AK Tube business units.

You may also like: AK Steel Holding Corporation Q4 2018 Earnings Conference Call Transcript

Earlier this week, rival steel producer Nucor Corp. (NUE) reported a 48% surge in first-quarter earnings to $1.63 per share, aided mainly by gains from an asset sale in its raw materials segment. Meanwhile, net sales dropped 3% to $6.10 billion.

Shares of AK Steel have maintained a steady downtrend over the past several years. They slipped to a near-three-year low in December. Though the stock regained strength since then, it lost momentum ahead of the earnings event.

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