POSCO Posts Weak Q1 Earnings, Lowers Outlook - Analyst Blog

Korean steel producer, POSCO PKX, reported a lackluster result for first-quarter 2014. Net income in the quarter fell 75.1% year over year to KRW 70 billion (US$65.6 million). Earnings per share were KRW 802.3 (or US$0.19 per ADR).

Revenues

POSCO's consolidated revenues were KRW 15,440 billion (US$14.5 billion), down 6.6% year over year.

In the reported quarter, crude steel production increased 2.6% year over year to 9.3 million tons while it fell 2.8% sequentially due to less working days and maintenance activities. Finished product sales were also down 0.4% year over year and 4.5% sequentially; export ratio of finished product sales was at 44.4%.
 
Steel sales for the automobile and shipbuilding industries increased 2.9% and 19.9% respectively. Steel demand from the home appliances industries was down 3.4%.

Margins

POSCO reported a 6.5% year-over-year increase in cost of sales in first-quarter 2014. As a percentage of revenue, cost of sales was 89.1%, down 60 basis points (bps) year over year. Gross margin was 10.9% in the quarter versus 11.5% in the year-ago quarter. Selling and administrative expenses were flat year over year at KRW 957 billion (US$0.90 billion).

Operating profits in the quarter increased 2.0% year over year, driven by healthy performance from non-steel operations. However, the operating margin decreased 20 bps year over year to 4.7%.

Balance Sheet

Exiting first-quarter 2014, POSCO had balance cash and financial goods worth KRW 6,725 billion (US$6.29 billion), up 6.3% from KRW 7,179 billion (US$6.83 billion) recorded at the end of the previous quarter. Non-current liabilities increased 2.0% to KRW 18,761 billion (US$17.4 billion).

Outlook

For 2014, POSCO expects consolidated revenue to be approximately KRW 63.5 trillion versus the prior expectation of KRW 65.3 trillion. Finished product sales are estimated to be roughly 34.9 million tons while crude steel production is estimated at roughly 37.9 million tons versus 37.7 million tons predicted earlier. Consolidated investments are likely to be within the KRW 5.7−KRW 5.9 trillion range, down from KRW 6.5 trillion expected earlier.

Domestic steel demand in second-quarter 2014 is anticipated to improve sequentially driven by demand increases from automobile, home appliance and shipping industries.

POSCO currently has a market capitalization of $23.1 billion. Other stocks to watch out for in the industry are Companhia Siderurgica Nacional SID, Gerdau S.A. GGB and ThyssenKrupp AG (TYEKF). While Companhia Siderurgica Nacional holds a Zacks Rank #1 (Strong Buy), Gerdau and ThyssenKrupp carry a Zacks Rank #2 (Buy).