Zacks_Analysts' Blog : Rating Reaffirmed on POSCO - Analyst Blog

South Korean steelmaker, POSCO (PKX) is the world's third largest steel producer on the basis of output. We prefer to remain on the sidelines for the company and have reaffirmed a Neutral recommendation on the stock.

POSCO appears to be very well placed to benefit from its wide regional diversifications, higher proportion of value-added products in its product mix and new facility additions over the longer term. Moreover, the company’s concerted efforts in expanding in fast growing markets, like graphene and synthetic natural gas and investments in raw materials will prove to be an added advantage.

According to the World Steel Association, the near-term outlook for the steel industry remains cautiously optimistic. According to the WSA, the world steel demand will increase by 6.5% in 2011 and roughly by 5.4% in 2012.

On the flip side, financial crisis in the European region, political unrest in other parts of the world, the Japan earthquakes and economic uncertainty in China, seem to restrict demand growth. At the same time, production remains at high levels, which in turn is affecting steel prices. Raw material prices are on the decline due to soft steel demands.

Consequently, the Korean steel market remains weak due to reduced demand from the automobile, shipbuilding and home appliance industries. We also expect fluctuations in demand for steel products to continue in the near future, which may adversely affect the businesses, yield from operations or financial condition of the company.

In the recently reported financial results, POSCO’s net income plummeted 78.5% year over year, primarily due to KRW 1.08 trillion foreign currency translation losses while revenue showed a 51.6% increase.

To add to the peril, competition is increasing manifold for the company, especially from peers like Arcelor Mittal (MT) and Nippon Steel Corp. (NISTY.PK).

The current Zacks Consensus Estimate for the fiscal years 2011 and 2012 are $9.84 and $11.58, reflecting a year-over-year decline of 19.41% and growth of 17.63%, respectively.