KeyBanc Announces Ratings Changes in Metals & Mining Capital Markets; Downgrades U.S. Steel & AK Steel

October 28, 2009 7:59 AM EDT

KeyBanc announces ratings changes in Metals & Mining Capital Markets stocks.

KeyBanc analyst says, "We are concerned the rate of real economic recovery in North America is occurring too slowly relative to current market expectations...Potential for further declines in ferrous scrap prices over the next couple months is supported by the recent $30/tonne decline in export scrap pricing. Domestic mills and export buyers remain on the sidelines, likely dampening the ability to substantially maintain or raise hot-rolled pricing realizations over the near term despite low supply chain inventories.

"Regarding our current thesis, we note 4Q earnings outlook commentaries by AK Steel and United States Steel appear somewhat disappointing given strong sequential flat-rolled shipment increases on top of strong 40%+ 3Q09 sequential volume recoveries. The outlooks clearly imply profit is very levered to pricing. With a more subdued pricing recovery unfolding, profit recovery will likely also be more gradual in nature. If sub-50% utilization was the problem, recovery to 65-70% capacity utilization in 2010 may not be adequate to support real pricing/profit recovery momentum. Accordingly, we are lowering our ratings on U.S. Steel (NYSE: X) and AK Steel (NYSE: AKS) to HOLD from BUY. Although we view each as early cycle beneficiaries of any meaningful increase in real demand and entities with solid financial footing, the increasing likelihood of a prolonged economic recovery has moved us to the sidelines for the time being."

"We are lowering our 2009 EPS outlook on AKS to a loss of $0.85 from a loss of $0.75, including a 4Q09 estimate of $0.20 (from $0.32)...Accordingly, we are lowering our 2010 EPS outlook to $1.20 from $1.80."

"We are lowering our 2009 EPS outlook on X to a loss $10.30 from a loss of $9.71, including a 4Q09 estimate of a loss of $1.07 (from loss of $0.15)...We are lowering our 2010 EPS outlook to $2.00 from $3.65 to account."

"We also note service center and end user re-stocking momentum may be hampered by continuing lack of credit availability. In our view, these issues put a premium on companies that are nimble, low-cost producers and those in place to support sporadic levels of demand as the recovery unfolds. Therefore, we reiterate our BUY ratings on Steel Dynamics (NASDAQ: STLD) ($20 price target); Reliance Steel & Aluminum (NYSE: RS) ($54 price target); and Olympic Steel (NASDAQ: ZEUS) ($33 price target). Additionally, we reiterate our positive thesis on shares of steelmaking raw materials suppliers, GrafTech International (NYSE: GTI) ($17 price target); and Walter Energy (NYSE: WLT) ($80 price target). These companies are more levered to a modest demand recovery given superior cost positions and more flexible operating structures."

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Related Entities

• UBS
• KeyBanc

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