POSCO (PKX) Q3 Earnings Up Q/Q on Higher Revenues & Margin

Korean steel producer POSCO PKX reported impressive results for third-quarter 2017. Net income surged 90.5% year over year to KRW 907 billion ($0.8 billion) while increased 71.1% from the previous quarter.

As noted by the company, the sequential growth in net earnings was primarily driven by increase in operating profit and benefit from selling investment securities.

Net earnings per share were KRW 2,598.9 or $2.30 per American Depository Receipt.

Revenues Improve

POSCO generated revenues of KRW 15,036 billion ($13.3 billion) in the third quarter. The top line improved 17.9% year over year and inched up 62 basis points (bps) sequentially.

Crude steel production in the quarter improved 10.8% sequentially to approximately 9.8 million tons while product production was up 5.9%. These improvements came on the back of completion of revamping of the Pohang Works’ Blast Furnace #3 as well as other maintenance projects at the same facility.

Product sales in the quarter grew 5.9% sequentially to roughly 9 million tons. As noted, POSCO’s domestic sales ratio grew 30 bps to 53.7%.

Margins Improved Sequentially

In the quarter, POSCO’s margin profile improved sequentially on the back of healthy contributions from both the domestic and overseas steel businesses, partially offset by weakness in the non-steel operations.

As a percentage of total revenues, cost of sales was 86.7% compared with 87.5% in the previous quarter. Gross profit margin expanded 80 bps to 13.3%. Selling and administrative expenses decreased slightly sequentially to KRW 873 billion ($0.8 billion). Operating profit grew 15% sequentially, with operating margin increasing 90 bps to 7.5%.

Balance Sheet

Exiting the third quarter, POSCO had cash balance of KRW 8,548 billion ($7.5 billion), up from KRW 7,533 billion ($6.6 billion) recorded in the previous quarter. Non-current liabilities increased 2.5% sequentially to KRW 13,996 billion ($12.2 billion).

The company’s current ratio in the third quarter improved 10.2 percentage points sequentially to 167.8% while liabilities ratio declined 1.5 percentage points to 68.1%.

Outlook

For 2017, POSCO anticipates consolidated revenues to be approximately KRW 59.5 trillion (up from earlier forecast of KRW 59.3 trillion). Finished product sales are estimated to be roughly 34.9 million tons (down from 35.1 million tons) while crude steel production is projected to be nearly 37.1 million tons (slightly above the previous projection of 37 million tons). Consolidated capital spending is likely to be KRW 3.3 trillion (down from KRW 3.5 trillion expected earlier).

Global steel demand worldwide is anticipated to grow 7% year over year in 2017 on the back of demand expansion in China, India, United States, European Nations, Southeast Asia and other emerging nations.

Zacks Rank & Key Picks

With a market capitalization of $22.9 billion, POSCO currently sports a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the industry include Outokumpu Oyj OUTKY, SSAB AB SSAAY and Salzgitter Aktiengesellschaft SZGPY. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Outokumpu Oyj’s earnings estimates for 2017 and 2018 have improved in the last 60 days.

SSAB AB’s earnings for 2017 and 2018 are predicted to grow 116.7% and 38.5%, respectively. Also, estimates for 2018 have improved in the last 60 days.

Salzgitter Aktiengesellschaft’s earnings estimates for 2017 and 2018 improved over the past 60 days. Also, on a year-over-year basis, earnings are predicted to grow 227.8% in 2017 by 38.2% in 2018.

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