AK Steel Holding Corporation (NYSE:AKS) shares are down more than -58.67% this year and recently decreased -0.24% or -$0.01 to settle at $4.22. Nucor Corporation (NYSE:NUE), on the other hand, is down -2.55% year to date as of 11/03/2017. It currently trades at $58.00 and has returned -2.50% during the past week.
AK Steel Holding Corporation (NYSE:AKS) and Nucor Corporation (NYSE:NUE) are the two most active stocks in the Steel & Iron industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect AKS to grow earnings at a 43.38% annual rate over the next 5 years. Comparatively, NUE is expected to grow at a 20.53% annual rate. All else equal, AKS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 14% for Nucor Corporation (NUE). AKS’s ROI is 14.70% while NUE has a ROI of 8.50%. The interpretation is that AKS’s business generates a higher return on investment than NUE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. AKS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.27. Comparatively, NUE’s free cash flow per share was +0.60. On a percent-of-sales basis, AKS’s free cash flow was -1.44% while NUE converted 1.18% of its revenues into cash flow. This means that, for a given level of sales, NUE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. AKS has a current ratio of 2.00 compared to 2.20 for NUE. This means that NUE can more easily cover its most immediate liabilities over the next twelve months.
AKS trades at a forward P/E of 7.15, and a P/S of 0.22, compared to a forward P/E of 13.36, a P/B of 2.22, and a P/S of 1.08 for NUE. AKS is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. AKS is currently priced at a -45.05% to its one-year price target of 7.68. Comparatively, NUE is -11.63% relative to its price target of 65.63. This suggests that AKS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for AKS and 2.10 for NUE, which implies that analysts are more bullish on the outlook for AKS.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. AKS has a beta of 2.90 and NUE’s beta is 1.61. NUE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. AKS has a short ratio of 3.54 compared to a short interest of 1.97 for NUE. This implies that the market is currently less bearish on the outlook for NUE.
Nucor Corporation (NYSE:NUE) beats AK Steel Holding Corporation (NYSE:AKS) on a total of 7 of the 14 factors compared between the two stocks. NUE is growing fastly, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, AKS is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NUE has better sentiment signals based on short interest.