Investors Overlooking Big Growth Opportunity At Posco

Jul. 3.12 | About: POSCO (PKX)

POSCO (NYSE:PKX), formerly known as Pohang Iron & Steel, is South Korea's largest steel producer with a 41 percent share of the country's domestic steel production in 2011. Last year, the company produced 37.325 million metric tons of steel, exporting just under 39 percent of that total, with the remainder slated for South Korea's domestic market.

The company's sales have been adversely affected by weak steel prices in emerging market China. However, the company trades at relatively appealing prices when compared to its peers and remains a great defensive play.

Posco should surprise on the upside, when it reports in July its numbers for the second quarter of 2012. Analysts are looking for second-quarter operating profits to touch USD900 million, a great performance by any measure. Operating margins should also surpass 10 percent, up from the 4.5 percent in the first quarter.

Driving this robust performance is the increase in sales of higher-priced premium steel products, rather than the lower-priced slabs. In addition, the weakness of the South Korean won coupled with the rise in export prices will allow Posco to perform well. Japan is of particular importance to Posco, beyond the advantages of the stronger yen. Posco shipped 7 million tons of auto steel sheet in 2011, with 11 percent allocated for Japanese carmakers.

If Posco becomes a main supplier to the Japanese auto companies, it could take more than 10 percent of the market with its shipments of auto steel sheet surpassing 1.5 tones over the next two years. The three major Japanese automakers consume around 13 million tons of steel sheet annually.

Facilitating this opportunity is the forthcoming merger between Nippon Steel (Tokyo: 5401) and Sumitomo Metal Industries (Tokyo: 5405). Japanese automakers historically have not purchased more than 40 percent of their steel from one supplier, but the merger will increasingly force them to meet their needs from one, consolidated source.

Posco, technologically savvy and with a strong foothold in the Japanese market, will be the logical supplier. This development is a huge growth opportunity for Posco, but so far investors seem to have missed the story. Posco's product mix also gives it an advantage over many of its competitors, which are more focused on construction-related steel products.

In 2011, about 7.5 million metric tons of the company's total steel sales - more than 20 percent of total steel sales by volume - came from the automobile industry. Shipbuilding was another bright spot in 2011, with sales of 4.25 million metric tons, up 42 percent compared to 2010.

Posco also continues to benefit from South Korea's large domestic manufacturing base. The country requires large quantities of steel for its significant domestic auto and truck production market, as well as for its vast shipbuilding capacity. Investors can find more high growth potential stock picks in my free report, Best Asian Stocks to Buy Now.

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