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POSCO: Earnings Weakness Continues

Zacks Equity Research

Korean steel maker, POSCO (PKX) reported a net income of KRW 292 billion in the first quarter of 2013, down 54.1% year over year. Earnings per share were at KRW 836.68 per share (US0.19 per ADR).

Net results were adversely impacted by impairment losses on holding securities.

Revenue: POSCO reported roughly a 10.6% year over year decline in its consolidated revenue that settled at KRW 14,582 billion (US$13.5 billion) for the first quarter of 2013. Results also plummeted 3.2% sequentially.

Non-steel sectors performed well during the quarter, registering a revenue increase of 3.4%. These were more than offset by a 12.9% decline in the steel sector revenue.

Crude steel production was weak in the quarter at 9,069 million tons, down 3.8% year over year. Finished product sales were also down 3.9%; export ratio of finished product sales was at 42.1% versus 40.0% in the first quarter 2012. Demand for finished products was strong from the Automobile and Home Appliances end-markets while weakness was noticed in the Shipbuilding market.
Margins: As a percentage of revenue, POSCO reported a year-over-year decline of 120 basis points in consolidated cost of goods sold. Gross margin came in at 11.5% versus 10.3% in the year-ago quarter.

Selling and administrative expenses in the quarter increased 3.3% year over year to KRW 957 billion (US$0.89 billion). Operating margin in the quarter improved 30 basis points and came in at 4.9%.

Balance Sheet: Exiting the first quarter of 2013, cash and financial goods of POSCO came in at KRW 6,226 billion (US$5.6 billion), down 4.7% sequentially. Non-current liabilities of the company were at KRW 17,187 billion (US$15.6 billion), up 0.7% sequentially.

Outlook: For 2013, management of POSCO expects consolidated revenue to be approximately KRW 64 trillion (versus KRW66 trillion expected earlier). Finished product sales are estimated to be roughly 34 million tons; crude steel production about 37 million tons while consolidated investments are likely to be approximately KRW 7 to 8 trillion.

Global steel demand is likely to grow by 3% year over year in 2013; being largely pushed by demand growth in China, U.S, India and Southeast Asian countries.

POSCO currently has a Zacks Rank #4 (Sell). Other stocks to watch out for are Gibraltar Industries, Inc. (ROCK) and Shiloh Industries Inc. (SHLO), each with a Zacks Rank #1 (Strong Buy) while Mechel OAO (MTL), has a Zacks Rank #2 (Buy).

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