AK Steel Holding Corporation (NYSE:AKS) shares are up more than 12.01% this year and recently increased 0.79% or $0.05 to settle at $6.34. TimkenSteel Corporation (NYSE:TMST), on the other hand, is up 12.57% year to date as of 01/26/2018. It currently trades at $17.10 and has returned -5.58% during the past week.
AK Steel Holding Corporation (NYSE:AKS) and TimkenSteel Corporation (NYSE:TMST) are the two most active stocks in the Steel & Iron industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AKS to grow earnings at a 21.46% annual rate over the next 5 years.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 0.77% for TimkenSteel Corporation (TMST). AKS’s ROI is 14.70% while TMST has a ROI of -3.40%. The interpretation is that AKS’s business generates a higher return on investment than TMST’s.
Cash is king when it comes to investing. AKS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.27. Comparatively, TMST’s free cash flow per share was -0.58. On a percent-of-sales basis, AKS’s free cash flow was -1.45% while TMST converted -0% of its revenues into cash flow. This means that, for a given level of sales, TMST 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 1.90 compared to 2.20 for TMST. This means that TMST can more easily cover its most immediate liabilities over the next twelve months.
AKS trades at a forward P/E of 8.73, and a P/S of 0.33, compared to a forward P/E of 14.25, a P/B of 1.28, and a P/S of 0.70 for TMST. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. AKS is currently priced at a -7.85% to its one-year price target of 6.88. Comparatively, TMST is -3.66% relative to its price target of 17.75. 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 2.60 for TMST, which implies that analysts are more bullish on the outlook for TMST.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. AKS has a beta of 3.05 and TMST’s beta is 2.32. TMST’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AKS has a short ratio of 3.29 compared to a short interest of 11.55 for TMST. This implies that the market is currently less bearish on the outlook for AKS.
AK Steel Holding Corporation (NYSE:AKS) beats TimkenSteel Corporation (NYSE:TMST) on a total of 11 of the 14 factors compared between the two stocks. AKS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, AKS is the cheaper of the two stocks on an earnings, book value and sales basis, AKS is more undervalued relative to its price target. Finally, AKS has better sentiment signals based on short interest.