POSCO (PKX) Q3 Earnings Driven By Lower Costs, View Intact

Korean steel producer POSCO (NYSE:PKX) reported impressive results for third-quarter 2016. The company’s net income was KRW 476 billion ($0.43 billion), as against a loss of KRW 658 billion ($0.56 billion) recorded in the year-ago quarter. The improvement was primarily driven by cost reduction initiatives taken by the company.

Net earnings per share were KRW 1,363.9 or US$1.22 per American Depository Receipt (“ADR”).

Revenues

POSCO’s revenue in the quarter totaled KRW 12,748 billion ($11.4 billion), decreasing 8.9% year over year.

Crude steel production in the quarter totaled 9.8 million tons, above 9.712 million tons recorded in the year-ago quarter. Finished product sales grew 2.6% year over year.

Margins

In the quarter, POSCO’s cost of sales declined 13.2% year over year. As a percentage of total revenue, cost of sales was 84.6% versus 88.8% in the year-ago quarter. Gross profit margin expanded 420 basis points (bps) to 15.4%. Selling and administrative expenses increased 1.1% to KRW 928 billion ($0.83 billion).

Operating profit surged 58.6% year over year to KRW 1,034 billion ($0.93 billion) while operating margin was up 340 basis points to 8.1%.

Balance Sheet and Cash Flow

Exiting the third-quarter, POSCO had cash balance of KRW 8,050 billion ($7.3 billion) versus KRW 8,405 billion ($7.3 billion) recorded at the end of the preceding quarter. Non-current liabilities decreased 3.1% to KRW 14,905 billion ($13.5 billion).

Outlook

POSCO maintained its 2016 financial guidance. For the year, POSCO expects consolidated revenues to be approximately KRW 58.7 trillion. Finished product sales are estimated to be roughly 35.3 million tons, while crude steel production is projected to be nearly 37.2 million tons. Consolidated investments are likely to be KRW 2.8 trillion.

Zacks Rank & Stocks to Consider

With a market capitalization of $17.2 billion, POSCO presently carries a Zacks Rank #2 (Buy). Other similarly ranked stocks in the industry include ArcelorMittal (NYSE:MT) , Ryerson Holding Corporation (NYSE:RYI) and Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ArcelorMittal’s average earnings surprise is was a negative 129.65% for the last four quarters. Also, earnings estimates for 2016 have been lowered while that for 2017 increased over the last 60 days.

Ryerson Holding Corporation reported better-than-expected results in three of four trailing quarters, with a positive earnings surprise of 58.12%. Also, earnings estimate for 2016 and 2017 have improved over the past 60 days.

Schnitzer Steel Industries has a solid earnings surprise history, with an average of 71.32% for the last four quarters. Also, earnings estimate for fiscal 2017 and fiscal 2018 have improved over the past 60 days.

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