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UBS Downgrades AK Steel, US Steel To Sell

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Shares of both AK Steel Holding Corporation (NYSE: AKS) and United States Steel Corporation (NYSE: X) have almost doubled year-to-date. UBS’ Matt Murphy downgraded the ratings for both the companies from Neutral to Sell.

AK Steel

The price target has been raised from $2.00 to $2.50. Although the company has some liquidity, it needs to manage its high cost base and track record of “sustained ongoing cash burn,” resulting in concerns over balance sheet deterioration over time, analyst Matt Murphy wrote.

“While we think there is a decent likelihood that AKS could roll its 2018 secured notes (given the $1.6B in book value), without a more meaningful escalation of free cash flow, we see a possibility that more meaningful liquidity issues could be encountered in 2019,” Murphy wrote.

Moreover, the analyst believes that AK Steel’s average sales price would decline in 2016, as contracts roll over and adjust to new lower market prices.

The diluted EPS estimates for 2016, 2017 and 2018 have been raised from $(0.50) to $(0.32), from $0.32 to $0.51 and from $0.39 to $0.57, respectively, to reflect the 10 percent increase in US steel price forecasts and lower long-term scrap price expectations.

US Steel

The price target has been raised from $8 to $12. The company is unlikely to generate sustainable FCF “under current steel prices and under our steel price forecast,” Murphy commented. Although cost controls and reductions in working capital have boosted US Steel’s cash flow position, these improvements would diminish over time, leaving the company in a “long-term cash burn position.”

While US Steel has $2.4B in net debt, it has enough liquidity to withstand low steel prices and utilization environment in the US in the near-term. The analyst added, however, that in case weak market conditions continue in the medium-term, “we become increasingly concerned about X's ability to generate sufficient cash flow to service and pay down debt.”

The diluted EPS estimates for 2016, 2017 and 2018 have been raised from $(2.89) to $(2.27), from $(0.29) to $(0.21) and from $0.44 to $0.52, respectively, to reflect the 10 percent increase in US steel price forecasts and lower long-term scrap price expectations.

Latest Ratings for AKS

DateFirmActionFromTo
Feb 2020CFRAUpgradesHoldBuy
Dec 2019UBSUpgradesSellNeutral
Dec 2019JP MorganUpgradesUnderweightNeutral

View More Analyst Ratings for AKS
View the Latest Analyst Ratings

 

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Posted-In: Matt Murphy UBSAnalyst Color Short Ideas Downgrades Price Target Analyst Ratings Trading Ideas

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