West Chester, Ohio-based steelmaker AK Steel shocked the stock market Tuesday with the report of a surprise Q3 profit -- sending its shares up 12% initially. Those shares gave back much of their gains on Tuesday but then recovered to post a further 8% gain in Wednesday trading.
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But was the news really as good as it seemed?
The newsAnnouncing earnings Tuesday, AK Steel reported that steel deliveries in the third quarter swelled 28% to 1.87 tons of steel shipped. Unfortunately, sagging prices on that steel (prices were down 2% sequentially, to $912 per ton) held sales gains in check, and revenues grew only 7.5%, to $1.71 billion.
The truly great news, though -- the news that drove the stock's tally last week -- was the fact that AK Steel says it earned a respectable GAAP profit of $0.04 per share last quarter. Given that AK lost $0.05 in this same quarter a year ago, and that Wall Street had told investors to expect a $0.06-per-share loss this year as well, you can understand why news of the surprise profit had investors jumping for joy.
AK's CEO was pretty pleased with the result as well. "Despite facing the continued onslaught of what we believe are unfairly traded carbon steel imports, we experienced our best quarterly financial performance in nearly six years," said CEO James L. Wainscott,in a statement that accompanied the earnings release. Wainscott credited "lower raw material costs" and "record" automotive shipments with producing the pleasantly surprising result, also noting that his company has been hard at work on "cost reduction initiatives" to boost profitability.
Incidentally, going forward, responsibility will fall on the shoulders of Wainscott's successor, current company CFORoger K. Newport, who will take over as CEO on New Year's Day 2016. Investors need not worry overmuch at the change in leadership, however. Turns out, the new CEO has even more experience at AK Steel than the man he's replacing -- whereas Wainscott joined AK in 1995, Newport has been there since1985, starting his career in the accounting department, and steadily rising through the ranks, and learning the business's ins and outs, over the past 30 years.
Profits -- and cashFor investors wondering how much longer AK Steel can survive in a market where steel prices keep sliding, even more important than the company's GAAP profits may be AK Steel's ability to produce cash to continue funding its operations. Fortunately, there's good news on that front.
Through the first three quarters of this year, AK Steel has now produced $200 million in operating cash flow, and spent only $70 million of that on capital investments. That leaves $130 million in real free cash flow generated -- a big improvement over last year, when by this point in the year, AK Steel had already burnt through nearly $420 million in cash.
Assuming the company can maintain its current momentum, $130 million in free cash produced over nine months should run-rate out to about $173 million in cash profits by year-end. Granted, weighed against the stock's $2.8 billion enterprise value, that still works out to an EV/FCF ratio of 16 -- a bit rich for a company expected to grow profits at only 5% annually over the next five years.
But even so, $173 million is $173 million that can be used to continue improving operations at the company or, even better, to pay down the company's monster debt load, which currently sits north of $2.4 billion. GAAP profits or no, as long as the cash keeps flowing, AK Steel still has a fighting chance at keeping its head above water -- and the bankruptcy lawyers at bay.
The article Did AK Steel Holding Corporation Deserve Its Price Pop Last Week? originally appeared on Fool.com.
Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him on our virtual stockpicking service,Motley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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