We believe that POSCO (PKX - Free Report) is a solid choice for investors seeking exposure in the steel space. The company is poised to gain traction from its initiatives to strengthen its businesses and healthy global steel demand.
The stock has been upgraded to a Zacks Rank #1 (Strong Buy) on Nov 16.
Year to date, the American Depository Receipts (ADR) of this Korean steelmaker have yielded 33.5% return, outperforming 3.9% gain recorded by the industry it belongs to.
Why the Upgrade?
POSCO performed well in third-quarter 2017, with net income growing roughly 90.5% year over year. On a sequential basis, the results improved 71.1% driven by increase in operating profit and benefit from selling investment securities. Crude steel production jumped 10.8% sequentially while steel product production was up 5.9%. Margin profile improved sequentially on the back of healthy contribution from both domestic and overseas steel businesses.
We believe that the company’s efforts to strengthen its competitiveness in steel production, focus on leveraging new businesses opportunities and improvement in financial as well as managerial structure will be advantageous. Completion of revamping work at Pohang Works’ Blast Furnace #3 and other maintenance projects at the same facility during the third quarter will make production hassle free going ahead.
Improving steel demand will create solid business opportunities for the company. On the domestic front, any investment by the government in infrastructure improvements and anticipated rise in demand in the automobile industry will work in the company’s favor. Per the World Steel Association report, the global steel consumption is predicted to grow 7% year over year in 2017 and 1.6% in 2018. The forecast for 2017 includes the impact of 12.4% growth expected in steel consumption in China. Excluding the demand anticipated from China, steel consumption in the world is predicted to grow 2.6% in 2017 and 3% in 2018.
For 2017, POSCO anticipates consolidated revenues to be approximately KRW 59.5 trillion, an improvement from the previous projection of KRW 59.3 trillion. Crude steel production is projected to be nearly 37.1 million tons, slightly above the previous projection of 37 million tons.
The stock’s earnings estimates for 2017 and 2018 have been revised upward in the last 30 days. Currently, the Zacks Consensus Estimate stands at $8.38 per ADR for 2017 and $8.86 for 2018, up from their estimates 30 days ago of $7.73 and $8.31, respectively. Also, earnings estimates for 2017 and 2018 represent year-over-year growth of 134.7% and 5.7%, respectively.
POSCO Price and Consensus