Morgan Stanley (NYSE:MS) likes the outlook for the overall steel sector, and AK Steel Holding Co. (NYSE: AKS) specifically, as it raised its rating on the steel producer from an "Overweight" rating to an "Equal Weight" rating. They have a price target of $24 on the company.
"AK Steel is turning the corner, and earnings power is not priced in: While shares across the steel space have become cheap as a result of the recent correction, we see significant value upside in AKS shares, in particular (70% to our PT of $24). Our mid-cycle EBITDA estimate is 30% higher than what is discounted in the shares on our view that benefits from sustainable cost cuts, a lesser impact from iron ore costs, and improving margins in the company’s key electrical steel business have gone unnoticed," said Morgan Stanley.
Concerning EPS, they said, "We are raising our estimates by 30% in 2011 and 20-40% in 2012-13; we are now 15-40% above consensus in 2011-12 and 75% above in 2013. Our $24 price target is based on 10x 2012e EPS, and 5.0x our mid-cycle EBITDA estimate of $131/t."
It's hard to believe this scenario will be the one to play out, as it's far above consensus estimates, and is the best of the best case scenarios if it is to become a reality.
Most steel industry watchers see a slow five-year period for the sector and pressure on the steel industry for some time.
AK Steel Holding closed at $14.08, falling $0.05, or 0.35 percent.
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