POSCO Looks Abnormally Cheap, Even Factoring In The Risks Of Empire-Building And Capacity Growth

Among the steel companies I regularly follow, Korea's POSCO (NYSE:PKX) has become more and more of an outlier, and not in good ways. While there have been steel companies whose shares have done even worse since my last update on the company, the performance is still notably bad compared to companies like ArcelorMittal (MT), Nippon Steel (OTCPK:NPSCY), Nucor (NUE), and Steel Dynamics (STLD).

Some of this underperformance can be explained by margin pressures from input cost inflation and uncertainties in the demand outlook, but POSCO also stands out from the crowd with its desire to pursue empire-building - if management has its way, steel will only be around half of the business in eight years and the company will have extensive operations in areas like battery and hydrogen production.

I don't necessarily think that reinvesting the cash flows from the steel operations into new businesses is a bad idea, but POSCO has a bad historical track record outside of steel (even if that record was built by other managers) and investors these days tend to want their steel companies to be steel companies. While POSCO does screen out as quite cheap on fundamentals, it's hard to say when sentiment will turn around.

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POSCO Looks Abnormally Cheap, Even Factoring In The Risks Of Empire-Building And Capacity Growth

POSCO Seeing A Broad Demand Recovery With Strong Price And Margin Leverage

The U.S. is in a class by itself where steel price momentum is concerned, but that doesn’t mean that operating conditions haven’t improved materially for South Korea’s POSCO (PKX) as well. With improving demand from a range of end-markets, including autos, appliances, construction, and machinery, prices have quite strong in Korea, putting POSCO in a stronger position to leverage the ongoing global recovery.

POSCO shares have done okay relative to global peers like Nucor (NUE) and Steel Dynamics (STLD) since my last update, keeping pace with a nearly 65% share price move, though ArcelorMittal (MT), Cleveland-Cliffs (CLF), U.S. Steel (X), and Ternium (TX) have done even better.

POSCO isn’t exactly cheap now on a long-term basis, but I wouldn’t expect that in a period of strong price recovery. Still, I see double-digit appreciation potential on the basis of near-term EBITDA and ROE prospects. I’d also note that while POSCO’s non-steel operations have often historically been a drag on the company, the prospects for businesses like POSCO Chemical are quite good.

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POSCO Seeing A Broad Demand Recovery With Strong Price And Margin Leverage

POSCO Now A Passenger As Investor Sentiment On Global Steel Demand Drives The Story

Back in the pre-Covid-19 days, I thought the valuation of POSCO (PKX) shares looked disconnected from underlying fundamentals, but that the shares could “bump along the bottom” for a few more quarters as investors factored in a weaker steel outlook for 2020. Covid-19 has thrown all of that out, and although the shares have actually held up quite well versus Steel Dynamics (STLD) and Nucor (NUE), and outperformed other non-U.S. steel stocks like Gerdau (GGB) and Ternium (TX), a roughly one-third decline in the share price is still pretty brutal.

Are POSCO shares trading too cheaply against even a grim, Covid-19-influenced outlook? I think so. But I also think that it’s going to take evidence of a global economic recovery, particularly in short-cycle end-markets, and improving global steel prices to really change sentiment. In other words, with reports of apparent demand declines of 20% or more coming out of markets like Europe, it’s going to be hard for sentiment to shift, but when signs of demand stabilization start to appeal, these shares should start to recover.

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POSCO Now A Passenger As Investor Sentiment On Global Steel Demand Drives The Story

POSCO Getting Less Than Its Due, But Conditions Remain Weak

South Korea’s POSCO (PKX) has perked up some in recent months, following an overall upward trend in many steel names that seems underpinned by the assumption that the worst is past for the steel industry. I have written previously that I find that viewpoint somewhat optimistic, as I think there is still room for demand (and by extension, prices) to disappoint in 2020 and cost relief may not be as great as investors hope.

When it comes to POSCO, though I do think the company could bump along the bottom for a little longer (a few quarters), I do think the company is going through the worst of the cycle. What’s more, I think POSCO has been sold off too far relative to its underlying quality. While I’d probably rather have ArcelorMittal’s (MT) customer base, I’d rather have POSCO’s business on the whole for the next cycle. As one of the cheaper names in the steel space that I follow, I think this one could have some appeal now for investors who feel like fishing near the bottom.

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POSCO Getting Less Than Its Due, But Conditions Remain Weak

POSCO May Be Near A Bottom, But Sluggish Demand Remains Problematic

Like most carbon steel manufacturers, I believe there's a good chance that POSCO's (PKX) EBITDA/tonne will bottom in the near future, quite possibly in the third or fourth quarter of 2019, but I also see relatively limited prospects for a sharp near-term turnaround. While key inputs like coal and iron ore have been getting cheaper, global steel demand forecasts continue to decline, and I don't see weakening economies in the U.S. and Germany, nor the ongoing U.S.-China trade dispute, as especially supportive of a near-term improvement in steel demand.

Also like many steel companies, POSCO shares look undervalued based on long-term norms for the sector. Unfortunately, investors often ignore those norms at the tops and bottoms of the cycle, and there's a lot riding on steel companies showing that conditions have, in fact, bottomed over the next few quarters. Although I do think POSCO shares are undervalued, investors have plenty of options in the steel sector and ought to shop around carefully, particularly as POSCO doesn't have a great track record with respect to value-added reinvestment of shareholder capital.

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POSCO May Be Near A Bottom, But Sluggish Demand Remains Problematic

POSCO's Share Price Seems To Be Predicting A Lot Of Doom And Gloom

Add POSCO (PKX) to the list of steel stocks with a confounding valuation, as investors seem to be pricing in a dire future that doesn’t seem fully justified by the financials. The trouble with cheap-looking valuations in commodity stocks is that you can be generally right about a “it won’t be that bad” thesis, and still see significant near-term declines as investors bail out of the sector on weaker prices and spreads.

POSCO shares look exceptionally undervalued now, so much so that I really have to second-guess what I’m missing in my modeling and analysis. While POSCO’s exposure to a weakening auto industry is a worry, as is the company’s new capex-heavy strategic plan, the market seems to be pricing in a pretty dire future for what I believe is at least a decently-run global steel major.

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POSCO's Share Price Seems To Be Predicting A Lot Of Doom And Gloom

Despite A Host Of Challenges, Ternium Is Holding Up

Predicting how investors will react to particular pieces of news can be difficult, and I look at Mexico’s Ternium (TX) as a case in point. You might think that weak demand in Mexico, an ugly situation in Argentina, and a struggling rebound in Brazil would all be pressuring the stock, not to mention the announcement that Steel Dynamics (STLD) is planning to build a large (3Mtpa) plant that will export to Mexico, would pressure the stock, but Ternium has held up better than many others in the steel sector, including Steel Dynamics, Nucor (NUE), POSCO (PKX), and ArcelorMittal (MT).

Even with this recent run of better (or at least “not as bad”) performance, the shares don’t look expensive. While the pricing concerns that trouble me with Nucor and Steel Dynamics do apply here as well, as does the concern about buying shares into what is likely to be declining EBITDA, I believe Ternium could return to growth sooner and that valuation is even less demanding.

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Despite A Host Of Challenges, Ternium Is Holding Up

Is It Too Late To Make Money With POSCO?

It’s difficult to get the timing right with cyclical stocks, as there’s often a discrepancy between what the numbers tell you and how the market actually behaves. In the case of steel, for instance, it’s common for institutional investors to start bailing once steel prices stop rising – leading to the frustrating phenomenon of strong revenue and earnings growth (as those higher prices flow through the business), low apparent multiples, and yet disappointing stock performance.

Having more than doubled from its lows in late 2015, POSCO (PKX) has indeed already enjoyed a good run, and I do have some concerns that the shares may struggle to reach apparent “fair value” if steel prices only remain steady (even if steady at very attractive and profitable levels). I do believe there’s a good argument for these shares trading at or above $100, but investors considering the shares need to be comfortable with the risk that they’re showing up late to the party and may get stuck cleaning up.

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Is It Too Late To Make Money With POSCO?

Ternium Brings Strong Execution To A Strong Market

A better-than-expected steel market over the past 12-18 months has added a welcome tailwind to a story I already liked at Ternium (NYSE:TX). Although cost creep and higher working capital needs have created some near-term concerns, Ternium management has continued to do a good job managing overall profitability, while also intelligently re-investing for growth. That, in turn, has led to okay share price performance over the last year - the 22% rise in the shares, outperforming the S&P and Nucor (NYSE:NUE), but coming up a little short next to Steel Dynamics (NASDAQ:STLD), ArcelorMittal (NYSE:MT), and Gerdau (NYSE:GGB).

I don’t expect the steel market to improve as much from this point, but I still see opportunities for better results from Ternium. The CSA acquisition and internal greenfield opportunities offer volume growth opportunities, and a revised ownership agreement for Usiminas (OTC:USNMY) should allow for ongoing exposure to Brazil’s recovery. With a fair value in the mid-to-high $30s, there still appears to be value in Ternium shares even as the NAFTA renegotiation process drags on.

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Ternium Brings Strong Execution To A Strong Market

Seeking Alpha: POSCO Another 'Wait And See' Story

It's not hard to find a steel company that looks undervalued on the basis of past cycles today, but there's a very real question now as to whether the large global players like ArcelorMittal (NYSE:MT) and POSCO (NYSE:PKX) will see the same sort of upturns as in the past given the increasing size and influence of Chinese mills. Relative to ArcelorMittal, POSCO is more leveraged to growing markets (relatively little of its exports go to North America or Western Europe) and the company can still benefit from a more lucrative mix and lower-cost production technologies.

I was much too early in liking POSCO a year ago, as pretty much the entire steel sector has continued to underperform on mediocre demand growth and increasing Chinese exports. Although I do believe it will be difficult for POSCO to achieve the sort of growth and margins it has seen in past upturns, I think valuation is looking pretty washed out at today's price.

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POSCO Another 'Wait And See' Story

Seeking Alpha: POSCO Looks Serious About Building Value

It looks like a new day for POSCO (PKX), Korea's giant steel company, as new management has made it clear that the empire-building of the past is going away in favor of a greater focus on margins, returns on capital, and businesses with long-term competitive advantages. The shares look like a decent enough value on near-term EBITDA, but the long-term potential is more attractive if the company can get back to mid-single digit ROEs in a year or two and double-digit ROEs down the road.

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POSCO Looks Serious About Building Value

Investopedia: POSCO's Above-Average Quality Already In The Shares

With economic weakness stretching from Europe to Asia to North America, there is no shortage of resource and commodity companies that appear to be trading below fair value. That's not quite so true in the steel sector, though, where valuations have seemingly held up a little better. Unlike global steel giant ArcelorMittal (NYSE:MT), which does appear to be meaningfully undervalued, South Korea's POSCO (NYSE:PKX) appears to be enjoying a relatively healthy benefit of the doubt from the Street. While I certainly wouldn't argue that POSCO will go along for the ride when investor sentiment on steel turns more positive, I think the margin of error here is too slight to make this a compelling buy today, even with the stock near a 52-week low.

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Investopedia: ArcelorMittal Looks Like A Good House In A Really Tough Neighborhood

Although the U.S. mini-mill companies Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD) have beaten the market over the past year, these are still tough times in steel, as stocks like U.S. Steel (NYSE:X), POSCO (NYSE:PKX), and ThyssenKrupp really have not been strong. Even though it may enjoy the reputation of being the best integrated steel company out there, that reputation hasn't helped ArcelorMittal (NYSE:MT) that much, as the stock has languished in a tough steel market. These shares do seem undervalued, but it's probably going to take more optimism about the global economy for shareholders to see the benefits.

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Investopedia: Back To The Future With ArcelorMittal

2012 has been a tortuous year for investors hoping for a steel rebound. While valuations across the sector have looked low, companies struggled to make price hikes stick and the slowdowns in Europe and China have led to widespread worries about demand. All of that said, ArcelorMittal (NYSE:MT) is now trading close to its 2008 troughs, but without the same debt and inventory worries that attended that low. Constant disappointment has blunted the virtues of making any sort of value call in the steel sector, but patient investors may want to look at ArcelorMittal as a long-range value turnaround.

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Investopedia: SK Telecom - More Than Meets The Eye?

Mobile phone service isn't the business it used to be. High penetration rates in most markets and increasing price competition has damaged the growth prospects of the industry, while increasing ADR and ETF growth has given investors more plays on non-U.S. markets. All of that said, there may be a little more skepticism in the price of SK Telecom (NYSE:SKM) than the fundamentals really support.

Not a Great End to The Year
That's not to say that the end of 2011 was especially strong for South Korea's leading wireless carrier. Revenue fell 2% as average revenue per user (ARPU) dropped more than 3% on rate cuts and lower fees.


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Seeking Alpha: If High Steel Prices Stick, U.S. Steel Has A Lot Further To Go

All you really need to know about whether U.S. Steel (X) stock will outperform this year is how strong steel prices will be. Simple, right? If only. Although steel prices have been heading higher in recent weeks and commentary from top mini-mills Nucor (NUE) and Steel Dynamics (STLD) has been constructive, there more than a few worries about the health of key markets like autos, construction, and energy.

A Tough Q4, But Who Cares?
By and large U.S. Steel had a disappointing quarter. Sales climbed 12% from last year, but dropped 5% from the third quarter. Shipment volume wasn't bad (especially in flat roll), but pricing was a little disappointing outside of the flat roll business. Worse, costs were quite a bit higher despite improved utilization and overall segment operating profit wasn't a profit at all. At the bottom line, U.S. Steel missed analyst expectations by a fairly significant amount.

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If High Steel Prices Stick, U.S. Steel Has A Lot Further To Go

FinancialEdge: Kim Jong Il's Death And The Markets

When news broke late Sunday night that North Korean dictator Kim Jong Il had died, there was pretty much an instant sense of uncertainty and nervousness in Asian markets. The reason for this unease is not hard to ascertain; North Korea is a desperately poor country with a huge military. If the new leader, Kim Jong Un cannot quickly cement his power and authority, there is the threat and risk of civil war, military provocation against South Korea and/or Japan, and a continuation (or escalation) of the brinksmanship that Kim Jong Il used to keep world powers ill at ease.

What will this change in power mean for the markets, both in Asia and in the United States?


Markets Generally Hate Uncertainty 
It was not surprising to see markets in South Korea and Japan sell off on the news of this change in North Korea. More than anything, markets hate uncertainty and there is now a gigantic red question mark where North Korean policy is now concerned. To that end, it is perhaps a bit surprising that gold was barely up as of early Monday morning.

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Investopedia: FuelCell Energy - Is The Corner In Sight?

Fuel cells are frequent fliers in the green energy discussion. Generally, about once every decade investors and columnists get fired up about the seemingly unlimited appeal of fuel cells and jump on the bandwagon - only to see that wagon careen off the road and into a tree. With a very different mousetrap and its first ever quarterly gross profit, though, maybe FuelCell Energy (Nasdaq:FCEL) can finally redeem decades of unrewarded optimism. By no means has FuelCell turned a corner, but maybe now the corner is actually in view. 


Strong Third Quarter Results
FuelCell jolted its investor base with a surprisingly strong third quarter financial report. Revenue jumped 65% as product sales jumped 81%. As part of the higher sales base, the company's productivity rose above 50 megawatts on an annual run-rate basis.

FuelCell also reached a significant milestone that has been long in coming for this industry - the company's first-ever quarterly gross profit. FuelCell is still losing money (an operating loss in excess of $7 million), but the red ink is fading a bit and the company has eased its cash outflow to under $6 million for the past quarter.



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Investopedia: Peabody Tries Again To Get Macarthur Coal

Give credit where credit is due - Peabody Energy (NYSE:BTU) does not give up easily when management sees a valuable asset that could improve its business. In this case, the company is trying again to acquire Australian metallurgical coal miner Macarthur Coal (OTCBB:MACDY). While the price that Peabody is offering is a little high, it is not too out of line with recent deals, and the operating leverage that Peabody has should allow the company to make a decent return even at these levels. 


A New Bid for an Old Target
Peabody has been interested in Macarthur Coal and its 175 million tons of attributable coal reserves for some time now. About a year ago, Peabody bid A$15 a share for the company, but ultimately found rejection from the target's board (and its large shareholders).

Now Peabody is trying again, but this time it's bringing a buddy. ArcelorMittal (NYSE:MT) already owns about 16% of Macarthur and was previously not in favor of selling out to Peabody. Now Peabody wants the company to be a partner, and the companies have launched a joint 60/40 bid for the company with Peabody as the projected controlling partner.


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http://stocks.investopedia.com/stock-analysis/2011/Peabody-Tries-Again-To-Get-Macarthur-Coal-BTU-MACDY-MT-PKX-XSRAY-VALE-TCK-WLT-ACI-PVR0712.aspx

Investopedia: Play Steel Dynamics For The Next Materials Story

Every commodity and resource boom is a little different, but it is not uncommon to see divergent trends between materials. Materials like copper and iron ore can have their runs only to be followed later by the likes of steel and aluminum. With steel prices starting to firm up, and industrial conditions staying strong, now might be a good time to consider the likes of Steel Dynamics (Nasdaq:STLD).


A Solid Open to the Year
Due in part to strong pricing, Steel Dynamics surpassed the average revenue estimate for the quarter. Investors should note, though, that there was a very wide range of published estimates ($1.1 billion to $2.2 billion). In any case, revenue rose nearly 30% from last year and almost 32% sequentially. Average selling prices rose 21% from the year-ago level, and more than 18% sequentially, while shipments rose about 10% on a sequential basis. (For more, see Steel Cycle Looks Good.)

The company's cost and profit performance was also stronger this time around. Scrap costs were higher, but operating efficiency handily surpassed that increase. Gross margin jumped more than a full point from last year, and nearly six full points from the fourth quarter. Operating margin improved even more - up more than 160 basis points from last year and more than tripling from the fourth quarter.


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http://stocks.investopedia.com/stock-analysis/2011/Play-Steel-Dynamics-For-The-Next-Materials-Story-STLD-NUE-AKS-PKX-CMC0420.aspx