POSCO Upgraded to Outperform

We recently upgraded Korean steel producer, POSCO ( PKX - Analyst Report ) from Neutral to an Outperform recommendation based on the company’s long-term growth prospects. The $6.2 billion company is the world’s third largest steelmaker on the basis of output.

The company was incorporated in 1968 and is headquartered in Seoul, Korea. Ever since its inception, the company has been earning the reputation of producing the best quality steel and steel products through 143 companies out of its total 202 companies operating across the world.

The company recently came out with its third quarter 2012 financial results, which were quite impressive as earnings per ADR came in at US$1.84, way above the Zacks Consensus Estimate of US$1.45. Total revenue, however, plummeted 7% in the quarter as weakness in the company’s steel business overshadowed its healthy performance in the non-steel businesses. Margins plummeted as costs soared high while debts were lower leading to lower debt-equity ratio.

Leaving aside the financial performance, we find POSCO’s expansionary efforts in the domestic market as well as in the international arena, especially the fast growing and emerging markets worldwide, quite remarkable.

Moreover, higher proportion of value-added products like cold-rolled steel, automotive steel plates and electric steel sheets in its product mix work in favour of the company. Also, the company has been increasing the use of cheaper raw material and reduced purchased-energy costs with an emphasis on cost saving which amounted to KRW 1,071 billion in 2012.

These long-term prospects get a bit marred by near-term concerns including rising costs and expenses as well as the impact of the financial crisis in the European region, slow growth in China and sluggish growth in the United States on the worldwide steel demand.

The stock currently has a Zacks #3 Rank, implying a short-term Hold rating while its nearest competitor Arcelor Mittal ( MT - Analyst Report ) bears a Zacks #5 (Strong Sell) Rank.