In Focus

Getting a Feel for Steel

NOTE: For the month of July we decided to feature public companies from some of the states the Chicks live in. This week we are doing Ohio (my home state), which has many companies listed on the Forbes 500 list. Here are the companies we have chosen to review (along with where they appear on Forbes' list): The Limited (185), AK Steel (372), Cardinal Health (51), and TRW (114).

How many of us can claim to really understand the steel industry? And yet it touches each and every one of our lives in some way, every day. From cars to appliances, construction and manufacturing, to snow and ice control products, the steel industry is absolutely monumental. With our current place of residence being the great State of Ohio, I have heard more about this particular industry than I ever thought I would. Which is only appropriate considering Ohio is home to the industry's number one producer of flat-rolled carbon, and stainless and electrical steels. AKS Steel (NYSE:AKS), which calls Middletown, Ohio its Corporate Facility, has by far the largest impact on the industry as a whole by beating its competitors in operating profit per ton by more than a two-to-one margin. And that's nothing new, folks. In fact, it's been going on for seven years. So why does this company's first quarter results give them the appearance of a company in trouble?

Let's start with the bottom line. In April, AKS reported pretty dismal results for their first quarter, 2001. There was a net loss of $12.8 million, and net sales were down 14% from the same time a year ago, to $998.8 million. Shipments were also down 6% and the company had to mark down its price for flat-rolled carbon from $716 per ton back in the first quarter of 2000 to $652 per ton in the first quarter of 2001. In 28 consecutive quarters, this is the very first quarterly net loss. Not good.

But like any intelligent Chick, I took it upon myself to get down to the nitty-gritty and find out just what is going on. And what I found made an incredible amount of sense. The steel industry is a slave to various other industries, and when those falter, AKS falters along with them. Any guess on which industries I might be referring to? How about Natural Gas? And then there's the Automobile industry, which has been hurting as of late. They have a massive impact on the sale of steel. Not only has the cost of vehicles gone down, but the demand to make more vehicles has, too. This is all bad news for AKS and other steel manufacturers, and directly affects their business. Thankfully, it doesn't mean the company's demise and their reputation and history speaks volumes for their future.

Like all the companies featured by the Chicks this week, AKS Steel is a Fortune 500 company. It boasted $4.6 billion in sales in the year 2000 and a $338 million operating profit. For 22 consecutive quarters they have paid common stock dividends and are involved in their third $100 million share repurchase program. At the end of the year 2000, AKS made no bones about the forthcoming year. They clearly stated their thoughts on a miserable market and reported that they felt the worst was not over for their industry. However, they would be one of the few to keep their heads above water. And though things may be on the down side financially, AKS continues to receive recognition for kicking tail in other areas.

AKS Steel is considered to have the best safety standards in the industry. Their injury rate is five times better than the industry average, and 12% better than their own record set in 1999. The National Safety Council awarded them the "Green Cross for Safety Medal," General Motors named them "Supplier of The Year," and Toyota gave them their coveted "Dual Quality and Delivery Award" for the seventh consecutive year. The list of awards seems endless, and clearly displays their dedication to quality. AKS is a firm believer that being an industry leader in Quality and Safety is a mutually beneficial standard for both the consumer and the company. It cuts down on costs and makes them the most attractive option in the market.

AKS Steel is also dedicated to being the most innovative company within the industry. With exciting and interesting products, such as their new antimicrobial compound used for home products contributing to personal health and food safety and their Black Coat stainless steel improving the cosmetic appearance of visible exhaust components in automobiles, their commitment to newer, better products makes them even more appealing.

As recently as June 26, 2001, the company announced its purchase of the Alpha Tube Corporation, a subsidiary of Acme Metals, Incorporated that went belly-up back in 1998. The Alpha Tube Corporation continued to successfully maintain its leadership of the welded steel tubing industry even after ACME filed for Chapter 11. So, for a mere $30 million dollars at an auction, AKS became the proud owner of Alpha. This acquisition will continue to give AKS its ability to offer what are called "value-added" steel products.

So the real question is whether or not what we have seen happening with AKS Steel's financial statements is a true indication of their situation. Obviously it is not. We have once again confirmed the Chick theory that a little research goes a long way. This is not a company in trouble, but a company experiencing the snowball effect of a sluggish, at times downright sucky, market. And it seems these guys are sturdy as...