Although there are some markets where lowest-cost manufacturing isn't a key aspect of success (like luxury goods), steel isn't one of them. In steel, those companies that can produce at the lowest costs often do the best. Although steel on the whole isn't the most popular sector right now, value-oriented investors might want to look into MittalSteel (NYSE:MT) while the fast money is looking elsewhere.
Third-quarter results were tough for this huge Netherlands-based steelmaker, but then that was generally expected. Though revenue was up 12% and shipments were up 18%, costs per ton sold climbed 24%. You don't win that way, and operating income dropped more than 60% in the quarter. Cash flow also took a dive in the period, with operating cash flow down about 31% from last year's third quarter.
As I've written before, there are some tough factors in the steel industry right now. Pricing has been soft, and Mittal's average price realizations would have been down 8% were it not for including acquisitions. Costs, though, have not eased much because the prices of energy, raw materials, and freight are all still pretty high. And then there's also the China factor: China has been producing a lot more steel, and everybody is concerned about what that will mean for global supply/demand balance.
And yet, I like Mittal. As fellow Fool Rich Smith has pointed out, this company has been going around the world and building a little empire for itself by buying up distressed assets. Actually, I should say distressed businesses because the assets are perfectly fine once they're brought into a better-run company. With growing self-sufficiency in coal and iron, Mittal is focusing on becoming a low-cost producer. Remember what I said before, low cost wins.
Of course, Mittal isn't the only company with that goal. Korea's POSCO (NYSE:PKX) has exceptional margins as well and a virtual monopoly on Korea's market (to say nothing of some advantages in selling to China and Japan as well). Both companies are also in good shape with respect to debt and liquidity.
Both Mittal and POSCO have mid-single digit P/Es and legitimate growth prospects. I would give the edge to Mittal on cash flow-based valuation, but POSCO does have a nice yield. Of course, you should also throw companies like Steel Dynamics (NASDAQ:STLD) and Nucor (NYSE:NUE) into the mix when you do your due diligence. Today, though, I would personally favor Mittal and/or Steel Dynamics, though all four are quality ideas in my book.
For more heavy metal Foolishness:
POSCO is a Motley Fool Income Investor recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
