Buying Calls of Steel Stocks (Part 2): AK Steel Holding Corporation

We continue the series on options of steel companies as we explore the options of AK Steel Holding Corporation (NYSE:AKS). AK Steel Holding with its market capitalization of $1.26B is an integrated producer of flat-rolled carbon, stainless and electrical steels and tubular products. The company’s operations produce flat-rolled value-added carbon steels, including coated, cold-rolled and hot-rolled carbon steel products, and specialty stainless and electrical steels that are sold in sheet and strip form, as well as carbon and stainless steel that is finished into welded steel tubing. Impressive Bullish Run AKS Holding has had a decent bullish run so far this year (relative to peers) and the stock has experienced an impressive bullish run leading up to a new 52-week high yesterday as the chart below shows. AK Stock chart Why Shares of AKS Surged Today Shares of AKS Steel surged yesterday after the stock reported impressive second quarter (Q2 2014) results that beat expectations. Shares of AKS Steel made a new 52-week high of $9.45 yesterday after following the earnings beat. The stock is also trading up nicely today with more than 3% in gains to make a $9.32 high in afternoon trading activities. Earnings at a Glance         

  • AK Steel reported earnings of $0.02 per share to deviate from the loss of ($0.30) per share that was reported in the same quarter last year and to beat the consensus analyst estimate of a loss of ($0.04) per share.
  • AKS reported revenue of $1.53B to mark a 9.3% increase over the $1.4B that was reported in the same quarter last year and to beat the consensus analysts’ estimate of $1.51B.
  • The strong earnings were boosted by shipments of 1,397,500 tons with an average selling price of $1,095 per ton.
  • The company also reported that it ended the second quarter on a strong note with liquidity of $539M.
  • The great result reported for the second quarter automatically marks the 11th consecutive quarter that the AK Steel has outperformed estimates.

Turnaround Story Confirmed The quote below from a statement made by James L. Wainscott, Chairman, President and CEO of AK Steel aptly carries the essence of what we can expect from AK Steel going forward. “We experienced meaningful improvements in virtually every aspect of our business in the second quarter as compared to the first quarter of 2014… Despite facing some significant challenges in the second quarter, on an adjusted basis, we earned net income and we are well-positioned for a much better third quarter and second-half of 2014.” AK Steel will provide its third quarter outlook in September but the quality of the second quarter results does not leave any doubt about the company’s upside potential in the near term. AK Steel has been facing serious liquidity challenges in the course of the last 5 years and the company has been trying to plug the leak in the ship with a number of cost-cutting initiatives. AK Steel has forecasted that it would be able salvage the situation and post positive cash flows of $149.4M by the end of this fiscal year. The outperformance in the second quarter results has confirmed the company’s forecast of returning to profitable ways by the end of this fiscal year. How to Trade AKS Options I expect the bullish trend in shares of AK Steel to move the stock forward and higher in response to renewed investor confidence on the stock. Analysts’ price target on shares of AK Steel has been generally low; for instance, Zacks has an $8 price target. I have an $11 price target and I recommend the AKS Jan 2015 10.000 call (AKS150117C00010000) at the asking price of $0.79.

— Daily Option Alerts

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