While the market’s attention has been focused on the expected direction of steel prices, AK Steel and U.S. Steel surprised us all this quarter by putting up strong core operating performance largely driven by substantial cost improvement. Just this past week we’d written that the mini-mills had impressed with actions taken (targeted acquisitions, expansions, sales mix improvement) aimed at lifting their profitability range – but that we’d been uncertain of the integrated mills’ ability to provide similar, sustained improvements. From what we’ve seen with the 2Q prints, AK Steel and U.S. Steel are making actual, measurable gains via Carnegie Way and facility closures that are driving a lower breakeven point and their own emphasis on higher margin, value-added steel…

We’re increasing our targets and estimates for AK Steel and U.S. Steel materially, though our steel price assumptions remain the same: For AKS we lift our PT to $6 from $5 as lower costs allow us to increase our projected ’17 EBITDA margin by 100bps, while for U.S. Steel we move to a $22 target from $16 on higher modeled margins in Flat-Rolled and a surprisingly resilient USS Europe division. Our base scenario still assumes a decline in average US HRC pricing to $545/t by 2017 (vs. $610-$630/t today), but should higher prices stick around due to import restraints we acknowledge the earnings leverage is substantial. If price realizations over 2017 were to trend $25/t higher than we currently model, our AK Steel/U.S. Steel EBITDA estimates would increase by 29% and 25%, respectively.

Shares of U.S. Steel have dipped 0.1% to $25.67 at 11:16 a.m. today, while AK Steel has dropped 1.8% to $6.01.

Source : barrons.com