Why Is Berkshire Buying Posco Stock?

That is the question many investors have been asking themselves since the recent announcement that Berkshire Hathaway owns a minority stake in the South Korean steel company.

As of Friday's (3/2/07) close, the 4 percent stake purchased by Berkshire Hathaway in 2005, according to CBS MarketWatch, is worth $1.35 billion. Already, the initial investment has more than doubled, rising over 102 percent and providing Berkshire shareholders a considerable return on the initial investment.

More intriguing than this, however, is the fact that Warren Buffet, Berkshire's legendary Chairman, is still very bullish regarding the company stating, business is "outstanding." After a quick look at Posco's website, the source of Buffet's optimism becomes evident.

According to the company, net profits for the fourth quarter, 2006 increased 148 percent year-over-year. Furthermore, the company's credit rating has been upped to A (Stable) from A- (positive) by S&P. The current rating is, by far, the highest of any company in the steel industry and signifies the confidence, which analysts have in the firm. The company is also rapidly expanding its international presence with major products throughout Southeast Asia, India, and Mexico and has significant technological advantages over its competitors.

Additionally, Posco has a virtual monopoly on its domestic market (South Korea) and the steel industry as a whole has experienced rapid consolidation in recent years, which shows no signs of letting up. Even better, the company trades at a significant discount to its peers in terms of its one year projected earnings and the company has an impeccable balance sheet. All of this points to higher earnings for Posco and higher stock prices for the firm's shareholders.

Disclosure: I am currently long this stock and am buying shares.