AK Steel Slides on Lower Steel Forecasts

AK Steel Holding Corporation (NYSE: AKS) shares moved sharply lower Thursday after weak demand led to an inventory reduction, sharply lower sales, and falling product prices. Prices have already fallen from $1,100 to $1,200 this summer to recent spot rates of around $650 to $700 per ton. These trends are expected to continue throughout the rest of the year, but just how far can steel stocks fall before the industry bottoms?

AK Steel is currently trading at just 1.08x earning while paying a 3.83% dividend yield. Meanwhile, the steelmaker is expected to earn $3.09 per share next year which puts the forward multiple at 1.68x earnings. The company also noted that steel prices remain under pressure and that the average selling prices will now fall at least 10%. Lower shipments to automotive, appliance and construction markets were the to blame for the declines.

Since the decline began, AK Steel has focused on leaning its operations and streamlining its processes. In addition to its large dividend yield, the firm also agreed to repurchase $150 million of its outstanding common shares in an effort to boost its earnings per share and stock price. Meanwhile, the cheap valuation of AK Steel has sparked some rumors that ThyssenKrupp and others may be interested in purchasing the company. However, ThyseenKrupp denied the reports late last month.

Investors interested in establishing a position without committing a lot of capital may want to consider purchasing LEAPS options. The January 2011 $5 calls can be purchased for just $2.80 right now, which means a position can be established for $280 for the rights to 100 shares compared to $522 for the same amount of underlying stock. Given the volatility, this downside protection may be worth the price while any long-term recovery to the upside over the next 791 days leaves lots of possibilities open.

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