With Posco (PKX) starting to move higher, up over 18% over the past 2 months and reaching 4 month highs, I decided to take a closer look into the company to see if it is an attractive opportunity. Here are four points I looked at while researching PKX:
Valuation: PKX’s current P/B ratio is 0.9 and it has averaged 1.4 over the past 5 years with a high of 2.6 and low of 0.7. PKX’s current P/S ratio is 0.4 and it has averaged 1.2 over the past 5 years with a high of 2.6 and low of 0.3. PKX’s current P/E ratio is 9.8 and it has averaged 7.0 over the past 5 years with a high of 16.7 and low of 2.5.
PKX’s trailing 5 year valuation metrics give a mixed message about the company’s valuation as two of them are below their respective 5 year averages and one is above. However, the P/B ratio is the more important one to look at here as because of the company’s cyclical nature, the P/S and P/E ratios could give mixed messages during troughs and peaks.
Price Target: The consensus price target for the analysts who follow PKX is $106.75. That is upside of 18% and suggests that the stock is fairly valued here with little upside.
Forward Valuation: PKX is currently trading at about $90 a share with analysts expecting EPS of $10.40 next year for a forward P/E of about 9. Revenues are projected to rise 1.4%. Taking a closer look at competitors provides more data on the relative valuation of PKX. Arcelor Mittal (MT) MT is currently trading at $21.19 and analysts expect the company to report earnings of $2.35 a share next year for a forward P/E of 9. MT’s revenues are projected to be flat next year. Ternium (TX) is trading at a forward multiple of 7 with revenue growth projected to be 0.5%. Mechel (MTL) is trading at a forward multiple of 4 with revenue projected to grow 4.5%. Gerdau (GGB) is trading at a forward multiple of 8 with revenue growth projected to be at 9.6% next year. The average forward P/E ratio of the four steel stocks is 7 suggesting that PKX is overvalued on a forward P/E basis.
Price Action: The stock was stable the first half of last year but then fell apart with the global markets in August. The stock then continued falling from its pre-meltdown level of $113 a share to $70 a share in early October. Since then, the stock rallied but traded no higher than $90 for a couple of months before finally breaking that level on Thursday. The stock is above its 50 day moving average, which sits at just below $84, and below its 200 day moving average, which is at $94.50. The $90 level should continue to play a key role in the resistance followed by the $100 area. On the downside, the $80-82 area should provide support followed by $75.
Conclusion: The valuation metrics are mixed as PKX looks overvalued on a relative basis but undervalued on a trailing valuation basis while analysts are neutral on the stock. PKX and other steel companies should stand to benefit as the economy continues to recover and demand for steel intensive goods, like cars, increases. PKX also is in Warren Buffett’s portfolio and deserves some credit for that. With that said, it looks like there are other better values within the steel stocks that may provide better opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.