We currently lowered our recommendation on POSCO (PKX), one of the leading Korean steel producers, from Outperform to Neutral.
Why Neutral?
POSCO has been well known for producing the best quality steel and steel products since its inception in 1968. The company works through its total 202 companies operating across the world.
Long-term growth prospects are bright for POSCO. The company has a high proportion of value-added products, like cold-rolled steel, automotive steel plates and electric steel sheets, which work well in its favour. It is also keen on developing new grades of steel to tap growing demand; roughly 128 new grades were developed in 2012 while 13 new steel making process technologies were innovated.
POSCO’s expansionary efforts in the domestic market as well as in the international arena, especially the fast growing and emerging markets worldwide, are quite remarkable. In 2012, the company completed four steel projects in foreign lands while implementing a few others, currently in progress in Korea, India, Indonesia, Mexico, Vietnam and Turkey in 2013 and 2014.
Despite the favourable long-term growth prospects, the recently reported quarter’s results as well as near-term headwinds emanating from rising international exposure, increasing costs, competitive forces, etc. forced us to adopt a Neutral view on the stock.
A glimpse into POSCO’s first quarter 2013 financial results reveals that impairment losses on holding securities pulled down the company’s net income by 54% year over year. Revenues were down by 10.6% owing to weak steel sector performance. Crude steel production fell as well as finished product sales declined.
Talking of margins, gross margin increased slightly as cost of sales slipped while operating margin gained despite a slight increase in selling expenses. Debts were higher in the quarter, leading to a rise in debt-equity ratio.
Management pulled down its consolidated revenue guidance for 2013 from KRW 66 trillion to KRW 64 trillion.
Other Stocks to Consider
POSCO currently has a market capitalization of $22.2 billion and is the world’s third largest steelmaker on the basis of output. Other stocks to watch out for in the industry are Angang Steel Company Limited (ANGGY), LB Foster Co. (FSTR) and Usinas Sider (USNZY), each with a Zacks Rank #2 (Buy).
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