AK Steel Surprised with 3Q15 Profit: Can It Keep On Delivering?
AK Steel’s cash flows
When market conditions are challenging, it becomes crucial for steel companies such as Commercial Metals (CMC), TimkenSteel (TMST), and POSCO (PKX) to generate free cash flows.
Generating negative free cash flows leads to cash burn. As a result, companies might have to borrow to fund the deficit. AK Steel (AKS) is already grappling with a huge debt pile. Negative free cash flows would only make things worse.
Investors who want to avoid the hassles of picking individual stocks can consider the SPDR S&P Metals and Mining ETF (XME). Currently, XME has invested almost half of its holdings in US-based steel companies.
2016 cash flows
Negative free cash flows have been an almost regular affair for AK Steel. The company has generated negative free cash flows in the last three years, as you can see in the graph above. Because its cash needs were higher than what its business generated, AK Steel has been a net consumer of cash in the last several years. However, in the last four quarters, AK Steel has generated positive free cash flows of $66 million, which is an encouraging development.
According to data compiled by Bloomberg, analysts expect AK Steel to generate free cash flows of $83.8 million in 2016. There are two factors that would work in AK Steel’s advantage in terms of free cash flows:
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no pension funding
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lower capital expenditure
Pension requirements
AK Steel has already completed this year’s pension funding requirement. More importantly, the company expects to have no pension funding requirements in 2016. This bodes well for AK Steel’s 2016 cash flows.
AK Steel has completed all of its growth capex (capital expenditure) plans. Now the company is only expected to spend cash toward planned and unplanned plant maintenance. Although AK Steel hasn’t yet provided its 2016 capex program, it could be lower than its current year’s capex.
In the next part, we’ll look at AK Steel’s outlook.
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