According to a report from Morgan Stanley, AK Steel is better positioned to weather European storm than US Steel.

Morgan Stanley lowered its estimates on US Steel based on the company's exposure to Europe. It cut its 2011 earnings estimates to 25 cents a share from 50 cents and reduced its 2012 estimates by 40 cents to USD 2.50 a share.

Morgan Stanley said that 24% of US Steel's revenue comes from European sales; 72% of revenue comes from the US. The company's European segment posted a loss of USD 50 million in the third quarter, wider than an USD 18 million loss in the second quarter.

It added that "Third quarter 2011 results for US Steel Europe were lower than the second quarter of 2011 primarily due to lower average realized prices as a result of a weaker spot market caused by the difficult economic conditions in Europe, particularly Southern Europe."

Morgan Stanley said that US Steel anticipates further losses in Europe in the fourth quarter. If there is a global recession, Morgan Stanley analysts said this would call for a permanent closure of the company's Serbia steel mill. A slow Balkan recovery and import competition have created a difficult operating environment, particularly in Serbia.

Morgan Stanley prefers AK Steel because of its liquidity profile, its defensive product mix and the markets that it sells into. The firm considers AK Steel's markets healthier than those of US Steel. About 86% of the company's revenue come from US sales.

Morgan Stanley said that US Steel's debt is also a concern for Morgan Stanley. The Pittsburgh based steelmaker has USD 300 million in debt which is due in 2012 and USD 862 million in convertible notes which would expire out of the money in 2014 in our bear case.

Morgan Stanley analysts suggest hedging steel sector risk because they don't anticipate prices will reach 2011 highs.

(Sourced from www.thestreet.com)