Shareholders who buy stock in a company own it. If investors believe the drop in shareholder wealth is due to poor management, they could be led to act, which could lead to a change in management or make the company subject to a takeover, said Carl Chen, University of Dayton’s William J. Hoben Professor of Finance.
If stock price and profits go down and the company has to pay higher interest rates to borrow, it could be forced to make layoffs to cut costs, Chen said.
“The stock price reflects the company’s profitability,” he said.
These things are of big concern to Butler County, which has an economy closely intertwined to the company. As Middletown’s largest employer, the success of AK Steel and Middletown Works is closely tied to the city’s fortunes. Between the company’s headquarters in West Chester Twp. and the Middletown steel plant, AK Steel carries approximately 2,400 full-time jobs in Butler County. It is the county’s third largest employer behind Miami University and insurer Cincinnati Financial Corp.
During trading last Monday, AK Steel shares changed hands at a new year-long low of $3.25 per share of common stock before closing at $3.38. The stock’s 52-week range as of Thursday was $3.25 to $7.85.
Analysts that research the steel and metals industry said no major surprise or event led to the drop. Shares of AK Steel have been sitting under $5 since November last year.
AK Steel released guidance March 22 for first quarter earnings. The company expects a net loss between 9 cents and 13 cents per share, in line with investor expectations. Shipment volumes of steel tons sold are expected to be lower this quarter compared to the prior quarter, AK Steel said.
“I think it’s just been more of the same,” said Bridget Freas, a senior equity analyst with Chicago investment research firm Morningstar Inc. “This is just more increasing uncertainty, mounting losses and they still have that huge underfunded pension.”
Prices are down 57 percent from a closing stock price of $7.92 March 25 a year ago; they’re down 85 percent from the same time in 2010; down 94 percent since this time in 2008; and down 9 percent from back 10 years in 2003.
For all of 2012, AK Steel had a $1 billion net loss, its fourth consecutive annual net loss.
“I think it’s important to point out that stock values for the steel sector have been impacted (due to economic conditions), including AK Steel’s stock,” said AK spokesman Barry Racey in an email.
“AK Steel’s Executive Officers and members of the company’s Board of Directors continue to have great confidence in the future of the company, as reflected by the fact that a number of them have been significant buyers of AK Steel stock during recent quarters,” Racey said.
This is a stock that hit a high closing price in May 2008 of $72.89 a share, at one point reaching above $73. The company had record revenues in 2008, riding a construction and housing boom.
Then the Great Recession happened.
Stock prices in those years before the economic crisis were inflated, said Freas of Morningstar.
“I think the market was pricing in a continuation of those kind of glory days of strong construction markets. It was very unrealistic,” she said. “Those valuations are not coming back.”
AK Steel Holding Corp. produces flat-rolled carbon, electrical and stainless steels used by the automotive, appliance, construction and manufacturing markets. It operates seven steel plants and other interests across the country, employing more than 6,000 workers.
AK Steel product goes in many big ticket items such as cars, refrigerators and washers that depend on consumers making more money. Light vehicle sales and new construction are improving in the U.S., but activity is still below pre-2008 recessionary levels.
Coming out of the economic slump, the steel industry faces increased competition from other steelmakers globally.
The domestic steel market is considered oversupplied, especially electrical and stainless steels, said Arun Viswanathan, senior equity analyst for Longbow Research, an investment firm based in Ohio with a New York branch office.
In other words, too much steel is chasing too little demand.
“Most steel companies are pretty challenged right now, but definitely AK is going through the worst of it because they don’t have internal supply of raw materials, namely iron ore and met coal, and they have to purchase those on the outside market,” Viswanathan said. “They also have a stainless and electrical steel business that is suffering from imports and overcapacity.”
Soaring prices for raw materials cut into AK Steel’s earnings in 2010.
AK Steel bought interests in 2012 in iron ore concentrate and coal companies. The goal is to become 50 percent self-sufficient for the raw materials it uses. But analysts say the benefits to the bottom line won’t fully materialize for at least another year.
“They also have a lot of debt and they also have a lot of capital expenditure requirements,” he said. “They also have a lot of historical liabilities like pension and health benefits for retirees.”
Steel companies United States Steel Corp., Nucor Corp., Allegheny Technologies Inc., Commercial Metals Co., and Steel Dynamics Inc. all saw their stocks slide after 2008 as the economy contracted.
But stock in Commercial Metals, Nucor and Steel Dynamics has appreciated year-over-year on March 25.
“If steel prices stay depressed for a long time AK may not be able to service its debt, it may not be able to make its legacy payments,” Viswanathan said.
“If this continues, it may have to ultimately file for bankruptcy,” he said. “There are definitely investors who are concerned about that and that explains in part why the stock price is so low.”
Ten years ago, AK Steel stock sank to prices below what it is now. In September 2003, stock sold for less than $2 a share.
James Wainscott was named the same month in 2003 to the position of acting chief executive officer of the company. Immediately prior, Wainscott was senior vice president and chief financial officer. He is now chairman, president and CEO of AK Steel.
In June 2008, soon after the company saw record prices above $73 a share, AK Steel announced that consulting firm World Steel Dynamics added it to the list of “World-Class Steelmakers,” reflecting the company’s “extraordinary” turnaround since 2003.
About 60 percent of AK Steel stock as of the end of 2012 was owned by institutional investors and mutual funds, not individuals.
“Prolonged stock price declines certainly will put pressure on management to make changes,” said Chen, of University of Dayton.
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