Should You Buy ThyssenKrupp Now?

| About: ThyssenKrupp AG (TYEKF)

Summary

Brexit has dampened the outlook for the steel industry.

ThyssenKrupp still struggles with high debt.

But higher margins signal improving profitability.

At the beginning of this week, ThyssenKrupp's shares (OTCPK:TYEKF) were among the winners of the Brexit recovery after it climbed Wednesday. Still, one cannot deny that future political uncertainties and economic volatility will dampen the outlook for industrial production and the steel industry in general. I would argue that while this is certainly a valid point, ThyssenKrupp is relatively well positioned in the market.

Buying ThyssenKrupp is by no means a no-brainer. The company has been struggling in the last few years and only managed to show more promising results last year. The company's significant reorganization has certainly helped to get the steel conglomerate's performance back on track. At the same time, it is now fighting with a huge debt pile that's substantially higher than its peers. This leaves ThyssenKrupp little room to take on further debt.

(As a consequence, though, criticizing the company's price/book ratio makes little sense at these high debt levels, as others have done.)

Debt/Equity ThyssenKrupp Click to enlarge

At the same time, ThyssenKrupp's positive signals seem to outweigh the negative ones, specifically through its growth and the business' profitability. Both the year-on-year change in revenue and earnings have improved and are substantially better than those of competing firms in the market.

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Looking at ThyssenKrupp's margins offers the most positive feature of the company's performance. Gross margins, as well as operating margins and pre-tax margins, are highly outperforming the industry median and signal an improvement of its operating cost base.

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It seems like ThyssenKrupp's restructuring efforts are bearing fruit and I don't expect this effect to be over soon. With its cost base seemingly under control we can expect a gradual reduction of its debt pile.

That the company is set well in the market does not depend on a potential merger with Tata Steel. As it is unclear if the rumors are true, the merger has certainly not been fully accounted for in the share price. If it were true, it would give ThyssenKrupp a unique and valuable position in the current market. It surely would reward the ones buying the stock now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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