Jefferies Presents Upside And Downside Scenarios For AK Steel

Following AK Steel Holding Corporation's (NYSE: AKS) fourth-quarter report on Tuesday, Luke Folta of Jefferies on Wednesday suggested potential upside and downside scenarios for the company.

Folta notes that AK Steel is among the highest steel-related company that is levered to weakening flat rolled price trends with an above average (albeit improving) cost structure. As such, the analyst adds that shares will continue to underperform its peers.

Underlying Investment Thesis

According to Folta, underlying steel demand will see improvements from key markets such as auto, white goods and general manufacturing. The analyst estimates that overall steel shipments are expected to improve 3 percent year-over-year in 2016, while EBITDA per ton will increase from $79 per ton in 2015 to $81 per ton in 2016.

Under these assumptions, AK Steel will earn $0.72 per share in 2016; EBITDA of $668 million.

Price Target: $4.75.

Upside Scenario

Upside scenarios include actual steel shipments rising 4 percent in 2016 and EBITDA per ton improves to $91 per ton.

Under this case, the company is likely to earn $1.03 per share in 2016; EBITDA of $755 million.

Price Target: $7.25.

Downside Scenario

Downside scenarios include actual steel shipments rising only 2 percent in 2016, while average selling price/metal spreads fall short by $5 per ton.