Opinion on  POSCO (PKX)     Sector: Basic Materials  >  Industry: Iron & Steel
Blog Rewind… Posco (PKX)

Before Excel Maritime (EXM) @ 7.50 per share and even before Hirsch International (HRSH) @ 1.25 per share or Lazare Kaplan (LKI) @ 8 per share. The first company even mentioned in the relative arbitrage was a South Korean Steelmaker Posco (PKX).

Here’s the article I wrote in January 2006:

When Warren Buffett was a small-time investor he was able to make easy money. He simply would buy great companies below liquidation value. Right now there is only one great company on the NYSE that trades below liquidation value. POSCO Steel. Right now POSCO shares are about $57 a share. Looking at the balance sheet I made an estimate for the liquidation value of the company. All it’s cash and investments is obvously worth 100%. I made it’s Net Receivables worth 80% at liquidation, I made inventory liquidate at 50% the current price (I’m being very conservative), and propery, goodwill, etc at 20%. There were some undefined assessts that I left out. When you subtract debt (which there isn’t much) and divide the number by shares outstanding I get about $62 a share. The most profitable Steel Company in the world with over a 3% dividend and trading almost 10% below liquidation value is less riskier than a US savings bond. Buying shares of POSCO is arbitrage.

If you look at Warren Buffett’s annual report I apparently was wrong about the first thing I said in making my point. I talked about when Buffett was a small investor he would have probably owned Posco, what I didn’t realize that as a big investor he also was buying shares of Posco. So is Posco still a steal (or steel)?

Well I will compare Posco to Nucor and Ipsco…as those are all major players in the market.

Nucor

3.8x Price/Tangible Book Value
1.2x EV/Rev
10.7x P/E
6 year ROE: 21.05%
6 year Profit Margin: 6%

Debt/Equity: 20% (Low Financial Leverage)

Ipsco

2.3x Price/Tangible Book
8.1x Price/Earnings
1.6x EV/Rev

6 yr ROE: 17.25%
6 yr Profit Margin: 10.15%
Debt/Equity: Around 40% (Some Financial Leverage But Not Overwhelming)

Posco

1.3x Price/Tangible Book Value
1.4x EV/Rev
8.7x P/E

6 yr ROE: 16.55%
6 yr Profit Margin: 12.07%
Debt/Equity: About 30% (Low Financial Leverage)

Now Posco and Ipsco are arguably the most profitable steel companies in the world. Yet Nucor and Ipsco trade at premiums to Posco while Posco has a monopoly in South Korea. I think one possible reason for the low valuation is China but investors should remember that Posco has superb managment and are slowly easing away from low-end commodity steel into higher end higher margin steel.

In conclusion Posco is still cheap.