Here's Why it is Time to Add POSCO (PKX) to Your Portfolio

We issued an updated research report on South Korean steel producer POSCO PKX on Dec 22, 2017. We believe that a diversified business structure, initiatives to improve competitiveness in steel production, focus on growth of other businesses and strengthening steel demand make this stock an attractive choice for investors seeking exposure in the steel industry.

The stock carries a Zacks Rank #2 (Buy). Its investment appeal is further accentuated by a favorable VGM Score of A.

POSCO’s earnings are projected to grow 5% in the next three-five years. Notably, its earnings estimates for both 2017 and 2018 have been raised by one brokerage firm. The stock has seen the Zacks Consensus Estimate for current-year earnings being pegged at $8.38 per American Depository Receipts (ADR) and at $8.86 for 2018, representing 5.9% and 2.7% growth from their respective tallies over the last 60 days.

Also, market sentiments have been positive for POSCO with the ADR yielding a return of 49.2% year to date. This gain is above the 21.8% rise of the industry it belongs to.

Below we discuss why investors should consider buying POSCO’s ADR.

Business Diversification a Boon: POSCO is well-poised to benefit from its diversified business structure, operating in steel, energy, materials, infrastructure and trading businesses. Prime-end markets served are economic research and consulting, architecture, electronic commerce, forest resources development, computer hardware and software distribution, crude oil & natural gas mining plus real estate development.

Furthermore, international diversity has played a major role in POSCO’s profitability over time. The company’s products are sold mostly in the Korean markets as well as exported to different parts of Asia, especially across China and Japan and also in Europe, the Middle East as well as North America.

We believe that such business diversification helps the company lower its risks by allocating investments in various financial instruments, industries and other categories.

Domestic & International Steel Demand: We believe that improvement in demand for steel will create solid business opportunities for POSCO. On the domestic front, any investment by the government in infrastructural development and an anticipated rise in demand in the automobile industry will work to the company’s advantage.

Also, the World Steel Association predicts the global steel consumption 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 China’s steel consumption as well as a rough 4.8% rise in the United States besides a 4.3% increase in India, 2.5% growth in the European Union and a 4.8% climb across the ASEAN countries. Excluding the demand anticipated from China, the worldwide steel consumption is predicted to grow 2.6% in 2017 and 3% in 2018.

Strategic Initiatives: Over time, POSCO has undertaken measures to improve its competitive edge in steel production, growth of other businesses as well as flourishing its financials and the managerial structure. Notably, completion of the 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. Also, the company has resorted to disposing of some profitable but non-core assets to strengthen its business portfolio.

Impressive 2017 Guidance: For 2017, POSCO expects consolidated revenues at approximately KRW 59.5 trillion, up from the earlier forecast of KRW 59.3 trillion. Crude steel production is projected at nearly 37.1 million tons, slightly above the previous projection of 37 million tons. Consolidated investments are likely to be KRW 3.3 trillion.

Other Stocks to Consider

POSCO has $24.1 billion market capitalization.

Some other top-ranked stocks in the steel producers space are Aperam APEMY, EVRAZ PLC EVRZF and Salzgitter Aktiengesellschaft SZGPY, all carrying a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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