AK Steel Still a Buy to $60
We expect AK Steel Holding Corp.'s (AKS) cost-reduction efforts and renegotiated higher-priced contracts to prevent excessive margin deterioration in light of higher commodity costs. The company has greater product diversification compared to its peers and is focusing on markets and products which have the greatest long-term potential to succeed.
We believe the company will gain from new projects, higher-selling prices, and increased shipment. Recently, the company had talks with several parties to divest itself. We reiterate the Buy rating and retain our six-month target price of $60.00.
Nearly 60% of AK Steel's business is under contract. The company has renegotiated the majority of these contracts at higher prices, which should boost margins. AK Steel has implemented surcharges on flat-rolled carbon and electrical steel products in response to higher raw material and natural gas costs.
The company expects a double-digit increase in the new contract prices of oriented electrical steel products. The company is considering cost-cut by headcount reductions. In the last three years, it has lowered its headcount by 26% to 6,600.
The company has set up a recycling facility to transform waste materials into cold-bonded briquettes used as feedstock in the blast furnace. Moreover, AK Steel also announced the construction of a new electric arc furnace that will significantly reduce stainless and electrical steel production costs. The company has greater product diversification compared to peers. It is trying increase competitiveness by focusing on its strongest product line, electrical steel. However, on July 31, Reuters reported that AK Steel is seeking an all-cash deal to sell itself.
Montpelier Re at Good Value
Montpelier Re's (MRH) second quarter operating earnings of $0.63 per share were slightly ahead of our expectations, attributable to a lower loss and loss adjustment expenses and active share repurchases resulting in fewer shares. Though the company made a provision of $15 million related to weather-related losses in the current period in U.S., it was more than offset by $28 million net subrogation collections and favorable prior year reserves.
While we remain concerned about the general softening in the reinsurance industry and increased competition, the company has begun to experience the benefits from its new initiatives -- premium declines from Bermuda have been replaced by premiums generated by the new Lloyds and U.S. platforms, with the London operation issuing an operating underwriting profit for the first time.
