NEW YORK (
reports its second-quarter results before Tuesday's opening bell, and most analysts are expecting the West Chester, Ohio-based company to deliver a strong performance.
The third quarter, however, may be another story as fellow steel company
United States Steel
indicated in its commentary on Monday after reporting its own second-quarter results.
"The United States and Europe continue to face an uneven economic recovery," said John Surma, the chairman and CEO of U.S. Steel, said in a statement. "The continuing fiscal uncertainty in the U.S. and Europe is not helping the situation. Reflecting the effects of a slowing economy, we expect to report an overall lower operating profit in the third quarter; however, we expect significant improvement in our Tubular operating income compared to the second quarter 2011."
U.S. Steel missed Wall Street's expectations for both profits and revenue for the second quarter, sending its slightly lower in late trades.
For AK Steel, the average estimate is for earnings of 50 cents a share in the June-ended period on revenue of $1.81 billion.
Analysts who spoke to
expect the company's electrical steel business to do well, but said the price of raw materials will probably hurt AK Steel as it does not own any mines and has to purchase all its materials from the market.
Execution, however, is seen as a strong suit for AK Steel. The company is viewed as one that "pays attention to the details," such as labor costs and efficiently manages energy costs for the production of steel for its customers.
AK Steel is relatively small compared to United States Steel, but it should see some benefit from the seasonal lagging of steel prices, which peaked in February. The company may have incurred high costs at the top in the first quarter, but its margins should have widened in the second quarter as it passed those costs onto its customers.
Wall Street will also be watching to see how AK Steel handles developments in the stainless steel market. More companies have started to determine stainless steel prices based on one-month lags. Traditionally stainless steel, which relies on nickel prices, has priced out at three months. But volatility of nickel has led producers to go to one-month lags.
Producers want to smooth out the volatility and the purchase patterns. For example, if nickel prices jumped in January, then buyers would possibly delay purchasing the metal until the price dropped again. Producers would rather have stability by matching inventories with prices. Therefore, many have rapidly moved to one-month lags. AK Steel's stainless steel operation is a significant piece of its business.
AK Steel shares closed Monday at $15.52, down 1.8%, putting the stock down 3.4% so far in 2011 and up 2.1% in the past year.
Wall Street is split on AK Steel ahead of the report with the breakdown of the 14 analysts covering the shares at one strong buy, 6 buy ratings, 4 holds, and 3 underperform ratings. The median 12-month price target sits at $18.50, implying potential upside of 20% from current levels.
Written by Joe Deaux in New York