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MMCapitalMgmt (99.91)

A short with plenty of upside



January 01, 2013 – Comments (0) | RELATED TICKERS: AKS , X , NUE

I came across a blog post about companies that have struggled this year and took a closer look at AK Steel Holding Corp (AKS).

The company's share value dropped by more than half, falling from over $10/share to a low of $3.59, before rebounding to $4.60. The recent rebound should provide investors with plenty of room to gain on the downside.

AKS witnessed an 8.4% decline in LTM revenue through September as its EBITDA margin shrank to a paltry 3.7%. Yet, the Company trades at approximately 30x forward earnings and 8.7x LTM EBITD, each indicating significant overvaluation for a company with that type of growth and margin. 

Shareholders should be very concerned about a future bankruptcy, given the company's new share issue in late November, indicating the company is desperate for capital to stay alive. Even with the additional equity raise and extreme dilution of shareholder wealth, the company maintains debt/equity and debt/total capital far over 100% (due to negative book value of equity).


The company's inability to generate cash flow to service its massive debt burdens only means one thing: bankruptcy is imminent. The question is not if, but when.


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