On Tuesday, Posco (NYSE: PKX) shares received a downgrade from CFRA, shifting from a Hold to a Sell rating. The firm also revised the price target for Posco significantly downwards from $70.00 to $45.00. The new valuation reflects a 0.35 times 2025 price-to-book value (P/BV), marking a 28% decrease from the company's five-year average.
The downgrade follows a 16% decline in Posco's share price since the last update, with a year-to-date drop of 40%. Contributing factors include Posco's recent removal from the Korea Exchange's Korea Value-Up Index on September 24, attributed to its low P/B ratio, which stands in stark contrast to the Value-Up Index's average P/B ratio of 2.6 across its 100 companies.
CFRA's assessment indicates a deteriorating fundamental outlook for Posco, driven by a combination of factors. These include a sluggish steel demand forecast, particularly due to a weak property market in China, a downturn in battery material prices, increased competition from higher Chinese steel exports within the Asia-Pacific region, and potential adverse effects from a U.S.-China trade war or tariffs.
The firm also anticipates that Posco's strategies aimed at margin expansion through the divestment of non-performing assets are likely to be undermined by weakening fundamentals in the steel industry. CFRA projects a decrease in Posco's operating profit margin (OPM), forecasting it to be 3.9% in 2024 and 4.5% in 2025, down from an OPM of 4.2% in 2023.
In line with these projections, CFRA has also adjusted its earnings per share (EPS) estimates for Posco. The firm now expects Posco's EPS to be KRW 5,641 in 2024 and KRW 6,882 in 2025, a reduction from the previous estimates of KRW 6,004 and KRW 7,565, respectively.
In other recent news, POSCO (NYSE:PKX) Holdings has managed to maintain stable revenues and operating profits in its third quarter, despite a downturn in the steel market and rechargeable battery materials. The company reported sales of KRW 18.321 trillion and an operating income of KRW 743 billion, largely due to the significant contribution of high-end steel products to profit margins.
In strategic developments, POSCO signed a Memorandum of Understanding with India's JSW Group for a steel mill development and collaborations in battery materials and renewable energy.
The completion of the Argentina Brine Lithium Phase 1 plant and ongoing restructuring efforts to improve financial stability were also highlighted. Despite market challenges, POSCO aims to enhance capital efficiency and sustain profit management.
The company is also shortlisted for the Altoandinos lithium project in Chile and is exploring lithium opportunities in Australia and the U.S. These are recent developments that reflect the company's resilience and strategic approach in handling fluctuating market conditions.
InvestingPro Insights
Recent data from InvestingPro adds depth to CFRA's analysis of Posco (NYSE: PKX). The company's Price to Book ratio stands at 0.4, aligning with CFRA's concerns about Posco's low valuation relative to its peers. This metric supports the analyst's decision to base their price target on a lower P/BV multiple.
InvestingPro data shows Posco's revenue for the last twelve months as of Q3 2024 at $55.83 billion, with a revenue growth of -5.36% over the same period. This decline in revenue corroborates CFRA's outlook on sluggish steel demand and increased competition in the Asia-Pacific region.
Two key InvestingPro Tips are particularly relevant to the current situation. Firstly, Posco is "Trading near 52-week low," which aligns with the significant share price decline mentioned in the article. Secondly, the company "Suffers from weak gross profit margins," with InvestingPro data showing a gross profit margin of 7.16% for the last twelve months. This supports CFRA's concerns about margin pressure in the steel industry.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Posco, providing a broader perspective on the company's financial health and market position.
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