We recently maintained an Underperform recommendation on the South Korean steelmaker POSCO (PKX), the world’s third largest steelmaker on the basis of output.
Recent financial performances and near-term prospects are weak for the company, which reported lacklustre results in the first quarter 2012. Net income in the quarter plummeted 41% while revenue was roughly flat year over year.
Crude steel production inched up 5.4% with roughly 40% being exported. However, weak margins due to higher raw material costs and soft steel market pulled down the earnings in the quarter.
Moreover, the outlook for the steel industry gets marred by the cautiously optimistic view of the World Steel Association. According to WSA, world steel demand will increase roughly 3.6% in 2012. Financial crisis in the European region, political unrest in other parts of the world and economic uncertainties in China seem to restrict demand growth.
We expect fluctuations in demand for steel products to continue in the near future, which may adversely affect the company’s businesses, results of operations or financial condition. To add to the peril, mounting competitive pressure from steel giants including Arcelor Mittal (MT) and Nippon Steel Corp is adding to the concern.
Despite the negatives, we cannot ignore the fact that POSCO still remains in an advantageous position to leverage benefits from the growing steel demand both in the global and domestic markets. Also, efforts to expand operations in the fast growing markets and industries are noteworthy; expected to fuel growth in the long run.
The Zacks Consensus Estimates for the fiscal years 2012 and 2013 stand at $7.61 and $8.66 per ADR, respectively. These reflect a year-over-year decline of 29.14% in 2012 and growth of 13.80% in 2013.Read the Full Research Report on PKX
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