Here is the quick note on fundamentals on AKS by Credit Suisse as of 1/25/10:
"Following Q4 results, we are maintaining our Neutral rating. We are raising our target price from $18 to $24. Our target price represents 6.0x and 5.5x our 2010 and 2011 EBITDA estimates, respectively. We are raising our 2010 EPS estimate from $0.76 to $1.26. 2010 Operating Targets…40% y/y volume growth appears conservative. AKS is targeting 2010 shipments of ~5.5m tons, +40% y/y, with a Q1’10 volume target of 1.37m tons. However, the Q1 and full-year targets imply basically flat quarterly volumes when compared with Q4’09 actual results. In our view AKS 2010 volume target will likely prove conservative, given the generally weak Q4’09 operating environment and given AKS own comments that their mills are now running at 85% utilization rates, vs. 70% average for Q4 (our full-year 2010 volume estimate is 5.7m tons, +45% y/y). AKS is targeting operating profits/ton for Q1’10 of $35 (vs. our previous est of $31), with further improvements beyond Q1 as the full benefit of price increases flows through results. Given ongoing raw material price pressures, we are raising our 2010 price assumptions (Our US HRC price increases from $550/ton to $600/ton). We maintain our broader view that US prices will be capped on the upside by underutilized capacity, but supported on the downside by the impact of higher raw-material costs on the high-end of the global cost curve.
Given the fundamental outlook and valuation, it appears that the stock is fairly valued currently trading between $19 and $24. On a technical basis, those levels coincide with support and resistance lines, respectively (see the daily chart). Therefore, I like the following iron condor that combines both credit call and credit put spreads:
- Buy to open March $25 call
- Sell to open March $24 call- Buy to open March $18 put
- Sell to open March $19 put
Does it meet the test?
5% - Check
10% - Stock closed on Wednesday at $21.37. $19 strike is 11.1% below and $24 strike is 12.3% above - Check
20% - The mark on this trade is $0.30. I am going to try for no less than $0.25 credit, which is 0.25/0.75 or 33.33% profit before commissions - Check
Additionally, if you closely look at the P&L chart, you will see three vertical red dotted lines. I have set the two corner ones on break even points, which reveals that there is a 16.67% probability of stock falling below $19, and 14.36% probability of stock going above $24 by March expiration. Think or Swim calculates these probabilities using net Delta on the trade being done. From my experience, they're pretty reliable.
Risks: I reviewed all historical option activity since Feb 1st (yes, I have a way to go back in time), and I don't see any unusual activity. The biggest risk here is its competitor Cliff Natural Resources (CLF) has seen its stock outperform both AKS and US Steel (X). CLF also has had call buying lately. Another competitor STLD also saw heavy call buying in March, but the stock has yet to perform. The risk is AKS can catch a bid or upgrade on a relative strength basis that could move the stock above $24. Also, I believe the US Dollar is a bit overextended in its rally. If US Dollar turns back down, it could add fuel in resource stocks. These are the risks we have to monitor.
Overall, I like the odds of the trade. Good luck!
