Steel company POSCO is standing out today, surging to $124.4 and marking a 17.7% change. In comparison the S&P 500 moved only 1.0%. PKX is 60.72% above its average analyst target price of $77.4, which implies future downside for the stock.
Yet the average analyst rates it as buy, a surprinsingly upbeat outlook.
POSCO Holdings Inc., together with its subsidiaries, manufactures and sells iron and steel rolled products in South Korea and internationally. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.
POSCO's trailing 12 month P/E ratio is 23.3, based on its trailing EPS of $5.35. The company has a forward P/E ratio of 8.2 according to its forward EPS of $15.24 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the industrials sector has an average P/E ratio of 20.49, and the average for the S&P 500 is 15.97.
To better understand the strength of POSCO's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
PKX's gross profit margins have averaged 10.6% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -1.8%.
POSCO's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 6,186,765,000 | -5,420,459,000 | 766,306,000 | -72.12 |
| 2021-12-31 | 6,259,365,000 | -3,510,830,000 | 2,748,535,000 | -47.02 |
| 2020-12-31 | 8,685,737,000 | -3,497,587,000 | 5,188,150,000 | 60.24 |
| 2019-12-31 | 6,004,655,000 | -2,767,006,000 | 3,237,649,000 | n/a |
- Average free cash flow: $2.99 Trillion
- Average free cash flown growth rate: -30.3 %
- Coefficient of variability (lower numbers indicating more stability): 60.8 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in PKX have received an annualized dividend yield of 13719.4% on their capital.
With an average P/E ratio, no published P/B ratio, and generally positive cash flows with a downwards trend, we can conclude that POSCO is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a stable trend, and a negative PEG ratio.
