Why AK Steel Stock Plummeted 10% on Tuesday

By Rich SmithMarketsFool.com

What happened

Continue Reading Below

Shares of Ohioan steel producer AK Steel (NYSE: AKS) got crushed on Tuesday, closing the day down 10.1%.

So what

This is not how things were supposed to work out. Last week, AK Steel rivals Nucor (NYSE: NUE) and Steel Dynamics (NASDAQ: STLD) both delivered earnings reports that were generally well received, encouraging some analysts (Macquarie Capital, I'm talking to you) to clamber out on a limb and predict good things for every steelmaker in sight.

More From Fool.com

As it turned out, Macquarie Capital wasn't all wrong, and AK Steel's news wasn't all bad. To the contrary, the $0.19-per-share profit that AK reported beat expectations on Wall Street and was AK's "best first quarter net income since 2008." The company's $1.5 billion in Q1 revenues likewise edged out expectations.

Image source: Getty Images.

Now what

But if all that is true, then why is AK Steel stock down 10%? Honestly, after poring over the report, I can see only one explanation: AK Steel was "profitable" last quarter, but it was only barely cash profitable.

I refer to free cash flow, an alternative method of determining a company's profitability, calculated by taking a company's cash generated by operations and deducting from it the company's capital spending. In AK Steel's case, the company reported earning $79 million in profit under GAAP accounting standards last quarter, but it generated only $36.3 million -- and then spent $32.5 million of that on capital investment. The result: Free cash flow at AK Steel was a meager $3.8 million last quarter, a 96.5% decline from the nearly $108 million in cash profit that AK Steel produced in the year-ago quarter.

If any investor was looking for an excuse to sell AK Steel stock today, I think that would qualify as a good reason.

10 stocks we like better than AK Steel HoldingWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and AK Steel Holding wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.