After a couple of years of tremendous results, Motley Fool Income Investor selection Posco (NYSE:PKX) has spent much of the last year tumbling back to earth. But its third-quarter results, released over the weekend, show that business and margins are stabilizing, and suggest reasons for cautious optimism.

Posco is the world's third-largest steel maker and a regulated near-monopoly in South Korea. In the latest quarter, its sales declined versus last year's third-quarter results, but improved nicely compared to the previous quarter. For the quarter, sales increased 13.4% sequentially, to 5,298 billion won ($5.5 billion). Because of slightly higher input costs, operating income grew at a slightly lower 13.1%, to 1,064 billion won ($1.1 billion).

Perhaps more importantly, the company's operating margin matched last quarter's result at 20.1%, and was a continued improvement over the 16.9% performance in the first quarter. In its investor packet, management noted that 90% of its cost-cutting goals for the year have been achieved. With that effort proceeding ahead of plan, pricing for steel stabilizing in China, and demand from the U.S. and Europe increasing, the company should be able to maintain or increase these margins in the near term. Also, because of its strong position in its home market, its margins and free cash flow should remain more stable than that of many other steel producers.

Posco's final forecast for 2006 calls for revenue of 25.2 trillion won ($26.4 billion) and capital expenditures of 3.9 trillion won ($4.1 billion). Given that operating margins will be around 20% for the year -- well below last year's record 27.2% -- it seems clear that free cash flow will be down from last year's more than 2 trillion won as well. Still, the company should earn somewhere around 1.4 trillion won ($1.5 billion). Considering its strong cash position and negligible debt levels, that level of free cash flow remains a strong showing for a company in a cyclical industry that appeared to peak in 2005.

Mittal Steel (NYSE:MT), United States Steel (NYSE:X), and Wheeling-Pittsburgh (NASDAQ:WPSC) may garner more of a following because of their greater size in Mittal's case or domestic familiarity for the others. Still, Posco's strong domestic position and expanding international business makes it worth paying attention to as well. Right now, it looks reasonably valued to me, but the company's 3.3% dividend yield, stable cash flows, and likelihood of slow but consistent growth as it expands internationally have it high on my list of stocks to watch for just the right opportunity.

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At the time of publication Nathan Parmelee had no financial interest in any of the companies mentioned. Mittal is a Motley Fool Inside Value selection. The Motley Fool has an ironclad disclosure policy.