Posco: Strong as Steel

Motley Fool Income Investor selection Posco (NYSE: PKX  ) turned in another strong quarter, and it sees more of the same coming.

Posco's financial results were stunning, with revenue up 32% compared to last year's first quarter. Operating income and net income followed suit, moving up 46% and 48% respectively. Posco's operating margin of 19.5% was 60 to 80 basis points below the last few quarters, but 260 basis points above last year's first quarter. Overall, the past 12 months have been very good for Posco, and some of the underlying details go a long way toward explaining why Posco's performance was so strong.

One large factor is that pricing for stainless steel and other higher-value products continues to improve. In addition, Posco has focused on driving sales in these higher-value products, helping to increase sales volumes as prices increase. On the cost side of the equation, Posco continues to invest and look for ways to lower energy costs and raw material costs through more efficient operations.

For those interested in looking a bit further ahead, Posco expects to turn in 3% to 4% gains in sales volume for the full year, but a 23% increase in revenue and a 16% increase in operating income. Going out to 2008, Posco expects global demand to be about the same as this year's 6% increase. Off the top of my head, I'd say this bodes well for pricing, so Posco's financial performance in 2008 should largely come down to product mix.

In its earnings release, Posco highlighted the trends it sees for a number of the raw materials used to make steel. The company sees demand for many of these materials increasing by 20% to 25%, and supply following this trend fairly closely. This is something to consider and pay attention to if you're looking at mining and coal companies.

The only big wart in Posco's earnings release is a page dedicated to comparing the valuation of Posco's shares to competitors United States Steel (NYSE: X  ) , Nippon Steel (OTC BB: NISTY.PK), and JFE Holdings (OTC BB: JFEEF.PK). It's true that Posco is attractive on relative valuation terms to these competitors, but I'm not a fan of a company cheerleading its shares. My advice to the folks at Posco's HQ is not to worry: If the results continue the way they have and global demand stays healthy, the stock will work itself out.

Six months ago, I noted that the downturn in margins at Posco had stabilized and that there were reasons to be optimistic, so I'm not entirely surprised by the good news. At the time, shares of Posco could be had for $68. Unfortunately, I didn't follow my own advice, so I've missed out on a more than 50% gain over the last six months. Given these results and the outlook for Asia over the next few years, I think there are still reasons to be optimistic.

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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.


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