POSCO: Cheapest It's Been Since 1993

Company

POSCO (PXK, Financial) is a multnational steel producer headquartered in Pohang, South Korea. As of 2011, the company had outputs of 39.1 million tonnes of crude steel, making the firm the fourth-largest steel maker in the world. The firm's numerous low-cost advantages has helped the firm maintain its competitive advanatage of competitors and reap large financial reward from that. Recently POSCO has had low profits caused by the increase in raw material cost compounded by the decline in steel prices caused by oversupply of steel in the market. Currently investors are fixated on these temporary setbacks rising the stock price down and creating a margin of safety for investors who buy its share now.

Company history

• In the 1960s the POSCO was established as a joint venture between the Korean government and TaeguTec.
• It began production in 1972 just four years after the company's inauguration in April 1968 with thirty-nine employees.
• Japan provided the money for the contruction of the initial plant, following the agreement at the Third South Korea – Japan Ministerial Meeting in 1969.
• POSCO started to sell plate products in 1972 and the firm focus its sales policies on the domestic market to improve steel self-sufficiency at home.
• By the late 1980s the firm was the fifth largest steel companies in the world.
• By the late 1980s the firm had an annual production of 12 million tons worth 3 trillion won.
• The firm completed its second-phase mill at Gwangyang in 1988.
• The completion of a third phased mill expanded steel production to 17 million tons a year.
• Throughout the 1980s the firm was the best steel manufactorer in the world in terms of productivity and facilities.
• In 1993 there was a change in managment and organizational structure of the company.
• The change in management led to the company becoming more decentralized and more diversifed.
• In 1994, the company created two subsidaries, Posteel and Postrade.
• Posteel is the domestic sales and service arm of the company.
• Postrade handles international trading of POSCO products.
• Both companies commenced full operation in September 1994.
• In 1997, Seoul announced that it was going to transform POSCO into a private company line with the government's new policy of privativing government owned corporation.
• By 2000 the privatization of POSCO was complete.
• As part of the privatization process, new Chairman Lee Ku-Taek began efforts to introduce professional management and governance for POSCO.
• Accountability to shareholders was made a top priority.
• The company introduced a performance-based evaluation and compensation system.
• The company increased its revenues and business profits.
• POSCO reported its largest profits in the global steel market in 2004 compared to its competitors.
• Net earnings shot up 80% to $1.66 billion in 2004 compared to the previous year.
• By 2006, the company had 26 subsidaries and invested more than $2.4 billion in fresh investments in mainland China.
• In 2006, the company started operating Zhangjiagang Pohang Stainless Steel; the firm had a capability of producing 600,000 tons of stainless steel and hot-rolled products annually in China.
• The firm became the first foreign firm operating an intergrated stainless steel mill in China.
• In 2005, the firm signed an agreement with the State of Odisha in India, under the agreement the firm plans to invest $12 billion to construct a plant with four blast furnances, an electricity plant, housing and will have an annual production capacity of 12 million tons of steel. Production will Start in 2010
• The project of of 2005, has been stalled due to strong local opposition.
• In 2007, Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway purchased a 4% stake in POSCO.

Business overview

The companyhas had the best-performing companies in the steel industry for the last 20 years. POSCO has maintained consistent high returns and consistently produced higher profits and margins than any of the firm's competitors. The company has heavy exposure to the prices of iron ore, coal and nickel; these raw materials are the largest cost component to the company. POSCO is in the process of raising the efficiency of the company with iron ore from 30% to 50% by the end of the year. The company will mainly acheive this through its investments in the Austrailian Roy Hill and Austrailian Premium Iron projects. Investing in emerging markets like Brazil, Vietnam, Indonesia and a number of others will pay off in lower input cost for raw materials. Korean steel is expected to grow at 4.0%, and the company's demand is expected to grow at 3.5% in 2014. Even with a 3.5% demand for its steel going forward, the company has put diversifaction of its business as a primer for future growth and hedging of its steel business. The company has increased its exposure to non-steel industries like energy, materials and gas. POSCO has been expanding its business globally to try and increase its presence in and tap new markets for opportunities. The company has competed a plant in Indonesia and is projected to produce $2.4 billion per year in sales. Also the company has receive permission to construct it $12.6 billion FINX plant in India. POSCO is also building plants in Chile and Argentina for its lithium venture. The company has maintained competitive advantage over competitors through economic scale, low-cost operation, advanced technology, operating large-scale assets with efficiency and strategic location on ports. POSCO news management team has been efficient at running the company and controlling costs. Managmetnt has linked managers' and directors' compensations to shareholders' return.

Subsidiaries

• Dawoo International
• POSCO E&C
• POSCO Engineering
• POSCO SS
• Posco Energy
• POSCO ICT
• POSCO Chemtech
• POSCO C&C
• POSCO P&S
• SNNC
• POSCO M-Tech
• POSCO PlantEC
• Sungjin Geotec
• POSCO AST
• POSCO TMC
• POSMATE
• POSCO Terminal
• POSCO A&C
• POSCO NST
• POSHiMETAL
• POSFINE
• Seungkwang
• eNtoB
• POSRI
• POSTECH VCC
• POSCO E&E
• POREKA
• Busan E&E
• POSWITH
• POSecohousing
• POSPlate
• Songdo SE
• Suncheon ECOTRANS CO Ltd.
• Posco - Nippon Steel RHF Joint Venture
• United Spiral Pipe LLC.

Financials

Balance Sheet

Cash Flow Statements

Income Statements

For the three months ended in March 2014, revenues increased 6% to W15.44 Trillion and net income decreased 75% to W69.84 Billion. Revenues reflect construction segment increase of 89% to W1.975 Trillion and Trading segment increase of 20% to W5.127 Trillion. Net income was offset by equity decrease from W1.27 Billion to W87.1 Billion.

Valuation

Currently the sell for 20x its earnings, 0.73x its book value, and sell for 14.3x its pretax earnings. POSCO is selling at its lowest valuation since 1993, for 20 years the company average 1.2x book value and currently selling for 0.73x book. If POSCO traded for 1.0x to 1.2x its book value then it would sell for $123.53 to $148.24. To ge to the real earning power of the company we need to find out what it has normalize earnings is over time. POSCO has a nomalize earnings of $4,401 million or on a per share basic is $14.10 far exceeding reported earnings per share of $4.08. After adjusting for normalize earnings, the company is really selling at 6x normalize earnings far below 20x earnings. If the company sold at 10x its normalize earnings then it would sell for $141 per share. POSCO is selling for 73 cents on the dollar giving any investor at least a 28% margin of safety. The company is selling at its lowest valuations since 1993 and is the most profitable steel company in the would.