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JPMorgan Upgrades AK Steel (AKS) to Overweight; Fundamentals Have Bottomed, Says Analyst

July 30, 2015 6:36 AM EDT
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Price: $1.55 --0%

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    2 Buy, 19 Hold, 3 Sell

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    Up: 9 | Down: 7 | New: 39
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(Updated - July 30, 2015 10:19 AM EDT)

JPMorgan upgraded AK Steel (NYSE: AKS) from Neutral to Overweight with a price target of $5. Analyst Michael F. Gambardella thinks steel fundamentals have bottomed and he sees improving domestic HRC prices.

"We think fundamentals for domestic integrated steel makers have recently bottomed. Falling imports coupled with stable demand should push steel prices higher throughout the end of the year. Steel prices have likely recently seen a bottom, and we also think AK’s 2Q results instead of its 3Q should represent a low for the current cycle. Despite extremely weak steel prices from high levels of imports, AK’s 2Q results were better than we expected as was its guidance for 3Q and 2H results to exceed 2Q and 1H levels respectively," said Gambardella.

"Going forward, the company’s earnings should benefit from higher shipments, production, and carbon spot prices as well as lower raw material costs, while FCF should be aided by lower capex and pension contributions. While the macro environment remains negative (strong dollar, weak China and weak oil), lower imports should push steel prices, the company’s earnings, and AK’s stock price higher in the near term," continued the analyst.

Gambardella added, "We would expect HRC prices to increase to the low $500/ton range by the end of the year as the import situation sees some improvement and demand remains stable. We think trade cases for corrosionresistant, cold rolled and potentially hot rolled should help to reduce imports into the U.S. Additionally, given current prices, the U.S. is no longer as attractive of a destination for exports as it once was. Finally, while hot rolled prices in China have continued to fall and sit below the $300/ton level, we don’t think these prices (which are well below our estimated Chinese cash costs of roughly $400/ton) are sustainable for an extended period of time."

For an analyst ratings summary and ratings history on AK Steel click here. For more ratings news on AK Steel click here.

Shares of AK Steel closed at $3.24 yesterday.



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