POSCO (PKX) Poised for Solid Growth, Runs Near-Term Risks

We issued an updated research report on South Korean steel producer POSCO PKX on Dec 9, 2014. On the basis of output, the company is one of the largest steel producers in the world, having produced roughly 38.3 million tons of crude steel in 2013.

With a well diversified portfolio and international presence, POSCO is working diligently to enhance its steel-production capabilities and consequently, benefit from the growing steel demand worldwide. The company prefers to increase value-added products like cold-rolled steel, automotive steel plates and electric steel sheets in its portfolio.

In Jan 2014, POSCO received a green signal for its $12 billion steel plant project in Orissa; while in the second quarter, the company expanded production at the Myanmar gas field and enlarged its coal-fired power business by acquiring Tong Yang Power. Also, the company completed the construction of its fourth hot rolling-steel plant in November and started construction of the Thailand-based automotive steel sheet-producing facility in October.

For fourth-quarter 2014, POSCO anticipates a slight sequential increase in steel demand on the back of favorable seasonal impacts and growing steel demand from the automobile industry. Also, the company revised its consolidated revenue projection for 2014 upward to KRW 65.5 trillion from KRW 64.5 trillion.

Despite solid long-term growth prospects as well as sound expectations for 2014, the presence of headwinds cannot be ruled out completely. Rising costs and expenses as well as growing competitive threats can prove to be a major deterrent to POSCO's growth. In third-quarter 2014, the company's earnings were adversely affected by a 6% increase in cost of sales as well as a 7% hike in selling and administrative expenses.

POSCO currently has a market capitalization of roughly $21.3 billion. It competes with other industry-players including Kobe Steel Ltd. (KBSTY), Nucor Corporation NUE and United States Steel Corp. X. While Kobe Steel sports a Zacks Rank #1 (Strong Buy), both Nucor Corporation and United States Steel hold a Zacks Rank #2 (Buy).