POSCO (PKX) has come a long way from being the first integrated steel mill in South Korea to a global business with production and sales in 53 countries worldwide. The company is no stranger to controversies. In March 2021, some of its employees in India protested over job opportunities and hiring practices, which led to fears of a production halt among investors. However, that issue was resolved quickly. Also, the company said on April 16 that it will end its joint venture with Myanmar Economic Holdings Public Co Ltd following pressure from activist groups to end ties with entities in Myanmar linked to the military.
Nevertheless, PKX reported impressive financials in the first quarter, ended March 31, 2021. The stock has gained 25.5% over the past six months and 7.6% over the past three months to close yesterday’s trading session at $77.26.
First Quantum Minerals Ltd. (FQVLF) said on May 19 that it has agreed to sell a 30% stake in its Ravensthorpe nickel mine in Western Australia to PKX, and that the companies have agreed to evaluate a strategic partnership to produce battery precursor materials from production at the mine. Furthermore, PKX is expected to continue to gain in the coming months given the increasing demand for steel products across several industries, including construction, automotive and machinery, with the fast-paced reopening of the global economy.
Note that PKX is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.
Here’s what we think could influence PKX’s performance in the near term:
Steel prices have been soaring this year, driven primarily by solid demand from China. With major economies reopening at a fast pace, the demand for steel is expected to increase more in the coming months. According to the World Steel Association, the demand for steel is expected to grow 5.8% in 2021 to reach 1,874.0 million tonnes. As a result, PKX is expected to benefit significantly.
PKX’s revenue increased 10.5% year-over-year to KPW16.07 trillion ($14.21 billion) for the first quarter, ended March 31, 2021. The company’s gross profit for the quarter increased 63.2% year-over-year to KPW2.14 trillion ($1.89 billion). Its operating profit came in at KPW1.55 trillion ($1.37 billion), up 120.1% year-over-year. PKX’s net income in the quarter came in at KPW1.48 trillion ($1.31 billion), which represents an 811.9% year-over-year rise.
In terms of forward non-GAAP P/E, PKX’s 8.62x is 43.3% lower than the 15.21x industry average. The stock’s 1.05x forward EV/S is 42% lower than the 1.81x industry average. Its respective 3.79x and 0.79x forward EV/EBITDA and P/S are also lower than the 7.93x and 1.45x industry averages.
POWR Ratings Show Promise
PKX has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on different categories. Out of these categories, PKX has an A grade for Value, in sync with its lower-than-industry valuation ratios.
The stock has an A grade for Growth also. This is consistent with analysts’ expectations that its revenue and EPS will increase 25.5% and 174.1%, respectively, year-over-year to $59.35 billion and $8.96 in fiscal 2021.
PKX has a B grade for Momentum. This is justified given its 25.5% gains over the past six months and 83.7% returns over the past nine months.
Also, click here to access several other top-rated stocks in the same industry.
PKX has declined 3.6% over the past month on concerns by some investors that the demand for steel from China could decrease. However, with the reopening of major economies, the company is expected to witness increasing demand for its products given its wide application across several industries. As the company’s revenue and EPS are expected to increase significantly in the coming quarters, we think the stock looks undervalued at the current price level. So, it’s wise to bet on it now.
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PKX shares were trading at $76.82 per share on Tuesday morning, down $0.44 (-0.57%). Year-to-date, PKX has gained 24.25%, versus a 15.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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