We currently maintain a Neutral recommendation on South Korean steelmaker POSCO (PKX), the world’s third largest steelmaker on the basis of output.
The company primarily manufactures steel for the shipping and construction industries and operates through its two steel production facilities, the Pohang Works and the Gwangyang Works.
The company’s consolidated group has a total of 202 companies with roughly 143 companies engaged in steel, steel supports, trading and material related works, while the non-steel companies are engaged in E&C, Energy, ICT, and Chemical industries.
According to the World Steel Association, global steel demand is expected to rise by 6% in both 2011 and 2012 because of sustained growth in demand from the emerging markets. Benefiting largely from its wide regional diversification, self-sufficiency in raw materials and higher proportion of value-added products, we think the company is very well placed to make the most of the growth momentum in the steel industry.
In the recently reported financial results, the company posted solid growth in both net income and revenues. Second quarter 2011 net income surged 22.6% year over year while the top line registered a growth of 58.0%.
However, the positive momentum for POSCO received a setback in the near term from a rise in the price of raw materials although in the second quarter, and the company registered a 76.6% year-over-year increase in its cost of goods sold. To make matters worse, competition is increasing manifold impeding growth, especially from peers like Arcelor Mittal (MT) and Nippon Steel Corp. and restricting the stock to perform in line with the market.
The current Zacks Consensus Estimates for fiscal years 2011 and 2012 are $11.34 and $12.65, reflecting a year-over-year decline of 7.17% and growth of 11.56%, respectively.
Thus, anticipating a lack of positive catalysts in the near term, we maintain a Neutral recommendation on the stock.
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