Is your portfolio looking a bit wobbly? Perhaps a bit of steel will help firm it up. As it happens, there's a steel company -- and a Motley Fool Income Investor recommendation -- unveiling its quarterly numbers tomorrow. Posco (NYSE:PKX) reports on fiscal Q1 2006 at the early (or late, depending on your diurnal orientation) hour of 2 a.m. Tuesday morning.

What analysts say:

  • Buy, sell, or waffle? Nineteen analysts follow Posco. Of these, 13 rate the stock a buy, four more a hold, and two a sell.
  • Revenues and earnings. A handful of these analysts contribute earnings estimates to FirstCall's polls, but none of them predicts what Q1's sales or earnings numbers will be.

What management says:
Posco recently filed an outline with the SEC of a business presentation that provides about as much information as an investor could wish for about current steel industry trends. Let me just highlight a few:

  • Contrary to popular wisdom, Posco expects that, as the steel industry consolidates, there will be more rather than less competition among the major players.
  • In line with current thinking, Posco highlights the growing power of the few big suppliers of raw materials (iron ore, etc.) to set prices that steelmakers must pay for their goods.
  • Posco aims to deal with both of these threats by moving its products up the value chain, focusing on premium, high-value-added steel goods, and leaving more commoditized steel products to other companies to produce.

What management does:
And none too soon, from the looks of Posco's margins. Two things are apparent from the table below. First, when steel is in high demand, as it has been recently, steelmakers earn margins that would even earn a nod of approval from Microsoft. Second, between high raw materials costs and expensive investment initiatives, Posco's margins are finally starting to contract, declining sequentially over the last three quarters, and falling from their year-ago levels as well.

Margins %

9/04

12/04

3/05

6/05

9/05

12/05

Gross

30

33.6

36.1

36.6

26.6

23.4

Op.

24.3

28.8

31.4

32.1

21

17.1

Net

19.8

21

23.1

23.5

15.8

5.6
All data calculated from data provided on Posco's website. Numbers reflect margins in the quarters named, rather than trailing-12-month numbers.

One Fool says:
In recommending Posco to subscribers of Motley FoolIncome Investor, lead analyst Mathew Emmert spoke approvingly of Posco's investments in its infrastructure -- the same ones that have been helping to reduce margins -- predicting that they will "further reduce operating costs" going forward. He also noted that "higher raw material prices have been consistently passed on to Posco's customers." If that proves as true in the future as it has been in the past, Posco's margins could soon recover their former strength.

Competitors:
Posco's closest competitors, in both senses of the word, are China's Baosteel and Japan's Nippon Steel (both private). More distant, publicly traded firms include Motley FoolInside Value pick Mittal Steel (NYSE:MT) and U.S. Steel (NYSE:X).

Posco is an Income Investor pick, and Mittal Steel is an Inside Value pick. Take the newsletter of your choice for a 30-day free spin.

Fool contributor Rich Smith does not own shares of any company named above.