AK Steel Jumps on Upgrades

A pair of upgrades by sell-side stock analysts push AK Steel shares higher Tuesday as stocks plunge and then march back on a wild day of trading.
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(AK Steel item updated for AK Steel stock-price movement and further commentary on Tuesday's trading session.)

NEW YORK (

TheStreet

) -- For once, shares of

AK Steel

(AKS) - Get Report

outpaced other steelmaker names on a wild day of trading in U.S. equities and the metals sector in particular.

Hogtied by the rising cost of iron core and pinched by a

coking-coal supply contract

with scandal-plagued

Massey Energy

(MEE)

, AK Steel had seen its stock plunge nearly 50% since it

first warned about the impact of high raw materials prices

on its bottom line, when it reported quarterly results in April.

On Tuesday, though, two sell-side analysts went public

with upgrades

of the stock.

Shares of the West Chester, Ohio-based company ended Tuesday's session by surging 11.4%, or $1.54, to $15.06. Volume reached 27 million shares, more than double the daily average turnover in the name.

Citigroup

(C) - Get Report

metals watcher Brian Yu lifted his rating on AK to buy from neutral, while

Bank of America Merrill Lynch's

(BAC) - Get Report

Kuni Chen upgraded the stock to neutral from underperform.

Even while hiking his rating, Yu said he cut his forecast for the company's 2011 earnings to $1.40 a share from $1.80 and reduced his 12-month price target to $19.

In a research note Tuesday morning, Yu noted that AK's stock has performed the worst among all the companies he covers -- a bevy of steelmakers and mining concerns, including Massey, the subject of a criminal investigation by the federal government in the wake of a mining disaster that killed 19 of its workers.

"In our opinion, the correction

in AK's stock price is overdone," Yu wrote, based on his earnings estimates and what he believes is an "ongoing recovery" in the domestic steel business. Taking into account Yu's lessened 2011 EPS forecast, AK shares are trading at a multiple of less than 10, cheaper than its peers.

Still, Yu admitted in the note, "AKS is exposed to escalating iron ore and metallurgical coal costs so some of the share price decline is arguably justified given the margin compression." Yu also believes AK management underestimated its iron-ore costs in the first quarter, "which will lead to a retroactive adjustment" in the second quarter.

On the positive side, Yu noted, spot prices for iron ore sold into China -- which represents the de facto reference point for the mineral for markets around world -- have slid some 20% since reaching highs in April. AK buys most of its iron ore from

Cliffs Natural Resources

(CLF) - Get Report

, which prices its Minnesota ore based on a formula, part of which entails the global price of iron.

A recent sea-change in the way

iron ore is priced

overseas means that Cliffs and its customers are in the midst of renegotiating their own supply contracts, the outcome of which has yet to reach a resolution.

A widely called steel-industry rebound in the U.S. and Europe has come in for increasing skepticism as the debt crisis across the pond deepens by the day. A trade group representing European steel distributors warned Tuesday that global oversupply may weigh on prices later this year, according to the trade newsletter

Steel Business Briefing

Steelmakers, especially in the U.S., have steadily if cautiously ratcheted capacity higher since the beginning of the year in preparation for what they saw as a sustained economic recovery.

Earlier this month,

Goldman Sachs

(GS) - Get Report

added shares of AK rival

U.S. Steel

(X) - Get Report

to the firm's

"conviction buy list."

Goldman's rationale: that a recovery was afoot and that U.S. Steel's integrated structure (it owns its own iron ore mines) would allow it to avoid the fate of AK Steel and others that don't control captive sources of their most important raw material. As iron ore prices rise, therefore, U.S. Steel stands to benefit as AK's profit margins shrink.

For Yu, though, shares of U.S. Steel -- along with

Patriot Coal

(PCX)

and

Titanium Metals

(TIE)

-- "present the most downside" risk of all the names he covers should Europe's debt crisis spread and help induce a dreaded economic "double dip."

The AK upgrade was part of 27-page brief by Yu on the state of the metals and mining sector in general.

Based on valuation, Yu said shares of copper giant

Freeport McMoRan

, iron ore miner Cliffs Resources and steel producer and scrap-metal recycler

Nucor

(NUE) - Get Report

offer investors the most upside.

U.S. Steel shares ended Tuesday's raucous session at $47.31, up 3.7%, reeling in sharp early losses with the stock tumbling as low as $43.61 intraday.

The rest of the steel sector behaved similarly Tuesday, swinging into positive territory after trading in the red for most of the session.

Shares of

ArcelorMittal

(MT) - Get Report

, the world's biggest steel producer, closed trading at $29.83, up 2.7%; Nucor added 1.5% to $42.90; while Russia's

Mechel OAO

(MTL) - Get Report

closed down 1% at $19.71, trimming much steeper losses early on.

-- Written by Scott Eden in New York

RELATED STORIES:

>>U.S. Steel Rises After Goldman Call

>>AK Steel at Risk From Massey Disaster

>>Iron Ore Upheaval Reaches U.S.

>>AK Steel: Iron Ore Costs May Hurt Results

Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.