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POSCO's Share Price Seems To Be Predicting A Lot Of Doom And Gloom

Stephen Simpson profile picture
Stephen Simpson


  • In addition to generalized anxiety over steel prices and spreads, POSCO may well be suffering from the current weakness in global auto production - a large and higher-margin market.
  • POSCO's capex plans suggest significant spending increases (including investments in new ventures outside of steel) and not much emphasis on shareholder returns.
  • POSCO shares look exceptionally cheap by many metrics, but the market sentiment on steel stocks is pretty awful right now.

Add POSCO (NYSE:PKX) to the list of steel stocks with a confounding valuation, as investors seem to be pricing in a dire future that doesn’t seem fully justified by the financials. The trouble with cheap-looking valuations in commodity stocks is that you can be generally right about a “it won’t be that bad” thesis, and still see significant near-term declines as investors bail out of the sector on weaker prices and spreads.

POSCO shares look exceptionally undervalued now, so much so that I really have to second-guess what I’m missing in my modeling and analysis. While POSCO’s exposure to a weakening auto industry is a worry, as is the company’s new capex-heavy strategic plan, the market seems to be pricing in a pretty dire future for what I believe is at least a decently-run global steel major.

Weak Auto Trends Not Helping

I’ve talked a lot about recent steel price weakness in articles on Steel Dynamics (STLD), Nucor (NUE), ArcelorMittal (MT), and Ternium (TX), and those pressures do also apply to POSCO to some extent, though POSCO ships very little steel to the U.S. (where prices are still very strong on a comparative basis), and much more than these other companies to China (where prices have been weaker).

What also may be hurting POSCO is its particular end-market exposures. POSCO is uncommonly leveraged to auto production, with more than a quarter of its steel going to global automakers (and POSCO supplies more than 50% of the sheet steel needs for over a dozen automakers). Not only does the auto end-market account for more of POSCO’s mix than any other steel company I follow closely (except stainless specialist Voestalpine (OTCPK:VLPNY)), POSCO is more heavily leveraged to higher-value steel varieties, which means that its operating profit exposure to autos is even

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s 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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