PKX - POSCO

[frommi]

I don't have any problems using normalized earnings for valuation but how you normalize those earnings is important. As I said, last year was really noisy with the losses in subsidiaries, investments and tax penalties etc. 2015 should give you a better idea about the earnings potential of this company in this challenging environment.     

 

EBITDA was not very noisy over the last years and the market has valued the company around 5.5-6x normalized EBITDA over the last years, so at current levels it appears to be at the upper range of fair value based on POSCO`s own history. You can even make the point that because of the debt it deserves a lower rating than in the past.

 

When you think they can sell assets above or at book while they are earning half of book, who is the buyer that overpays 2x?

[tylerdurden]

I don't have any problems using normalized earnings for valuation but how you normalize those earnings is important. As I said, last year was really noisy with the losses in subsidiaries, investments and tax penalties etc. 2015 should give you a better idea about the earnings potential of this company in this challenging environment.     

 

EBITDA was not very noisy over the last years and the market has valued the company around 5.5-6x normalized EBITDA over the last years, so at current levels it appears to be at the upper range of fair value based on POSCO`s own history. You can even make the point that because of the debt it deserves a lower rating than in the past.

 

When you think they can sell assets above or at book while they are earning half of book, who is the buyer that overpays 2x?

 

I did not comment on their restructuring efforts but since you mentioned they just sold some part of Posco E&C to Saudis with 0.9 p/b. I agree that they can't get super high values through asset sales but if you have extremely low valuation at 0.5 p/b you have a pretty low valuation hurdle for your restructuring efforts. In terms of the valuation, you can use different metrics, EV/EBITDA, EBITDA/ton steel production, p/b etc. and different time periods to make a point. The noise I was referring was the performance of the non-steel subsidiaries and write-downs in equity ownerships plus the tax penalties from last year. All these have an impact on the sentiment and we all know how sentimental "market" is. Time will tell but if they don't have any issues w/ subs, their equity investments, other unforeseen events price should be significantly higher in a couple of quarters

[RadMan24]

I don't have any problems using normalized earnings for valuation but how you normalize those earnings is important. As I said, last year was really noisy with the losses in subsidiaries, investments and tax penalties etc. 2015 should give you a better idea about the earnings potential of this company in this challenging environment.     

 

EBITDA was not very noisy over the last years and the market has valued the company around 5.5-6x normalized EBITDA over the last years, so at current levels it appears to be at the upper range of fair value based on POSCO`s own history. You can even make the point that because of the debt it deserves a lower rating than in the past.

 

When you think they can sell assets above or at book while they are earning half of book, who is the buyer that overpays 2x?

 

Any investor in US steel, AK Steel, or any other steelmaker in the past five years that has lost money or continues to lose money today.

[frommi]

I only try to see what Munger, Buffet and Pabrai see. Of course you can ignore them, but is it wise?

I am still a student of value investing, so you can safely choose to ignore my posts. :)

 

[karthikpm]

John Mihaljevic and the Manual of Ideas have touted POSCO as their pick in the recent Asian Value edition ( they picked it 1 year ago and now ). They think the long term thesis on POSCO is unchanged and it's a better idea now compared to last year

[tylerdurden]

I only try to see what Munger, Buffet and Pabrai see. Of course you can ignore them, but is it wise?

I am still a student of value investing, so you can safely choose to ignore my posts. :)

 

Agreed. We are all learners at the end of the day but those names are not gods either. They are perfectly capable of making mistakes as well. Personally, I don't think Munger was following Posco in detail lately. The reasons he mentioned in DJCO annual meeting was very high level and were out there for at least number of years I think. Who knows what Pabrai does. He is in and out from Posco historically and I have not heard Buffett really sold his shares from a credible source yet. Even if he did, it does not change the intrinsic value of this enterprise and that of course is up to every investor to value for himself...

[zenith]

The CEO said just days ago to reporters that this quarter is solid, although he also mentioned that metal spread could contract in 2Q15 due to sharp decline in steel spot prices. 1Q15 earnings are critical.

[Against the crowd]

It looks like Posco's India project to be shelved.....They have already shut down their E&C business in India and laid off most people

 

http://www.bloomberg.com/news/articles/2015-03-27/posco-said-to-be-backing-away-from-12-billion-india-project

 

If this happens.....i will be it will relieve lot of investors about their cash needs.

 

 

 

[RadMan24]

I only try to see what Munger, Buffet and Pabrai see. Of course you can ignore them, but is it wise?

I am still a student of value investing, so you can safely choose to ignore my posts. :)

 

I'm in complete agreement.  The interesting take is that Posco, with its thousands of PhD engineers, make these advanced processes and products, yet hundreds of other steel companies are now able to produce mass volumes of hot and cold rolled steel, which decreases the price of all steel dramatically, along with lower input costs from iron ore and coal, that the labor know how and technological advantage are completely washed away by the commodization of the market. That's what Munger seems to view, the market's view, and reality.  Now the question is, what does Posco have to do to avoid this fate?

 

The company's strategy is well known, the key seems to be reinvest in the core business, make strong strides into new advanced steel products and enter new or develop markets for its steel, which is crucial as competitors will be looking into more higher value steel to increase their own margins.  This is reasonable, the ship building industry is likely going to slow down, but the nuclear industry could pick up, auto industry is still very strong and high strength, low weight steel is in high demand. 

 

When the CEO came in, he had a strong emphasis on refocusing the company and highlighting the competitive industry that the company faces. He wasn't kidding, competition is fierce, which destroys margins. The only way Posco works out as an investment is that they keep developing new superior products and increase the volume of those products to offset the commodization of the other aspects of the business.  Not going to be easy.

 

I still think that if the market is selling Posco as a regular old commodity steelmaker, then you do have some margin of safety if they are unsuccessful or if steel prices remain depressed for a long period of time. What you have now is the news of Buffett, Munger, Pabrai all selling shares, depressed steel market, and depressed earnings from Posco, I imagine that is a hard sell to any portfolio manager to buy shares today.  If you work in the industry, you gotta have a pair of balls to go and say, lets buy Posco, they're wrong, I'm right. Individual investors have it a little easier, but not much, if the company hasn't improved in a year or two time, I'll be looking for a replacement. 

[alwaysinvert]

This says BRK hasn't sold:

 

http://english.yonhapnews.co.kr/news/2015/04/14/0200000000AEN20150414010300320.html

[zenith]

they report earnings next week, but there has been an unusual large amount of put buyers at the May 55 strike price.

[lathinker]

Q1 profit jump, tough Q2 ahead due to Chinese/Russian competition...

 

http://www.business-standard.com/article/reuters/posco-q1-profit-up-20-pct-low-iron-ore-costs-outweigh-weaker-steel-prices-115042100307_1.html

[tylerdurden]

Steel margin stays solid but sales are going down bcs of the chinese/russian exports. Management guided towards a challenging Q2 in terms of steel environment. As usual, at least one subsidiary caused underperformance (this time E&C) and equity investments also had write downs. Positives are the increase in World Premium products share to 36% and surge in exports. Let's see how long we'll wait to see this turning around...

[lincolnc]

http://www.forbes.com/sites/phildemuth/2015/04/13/charlie-mungers-2015-daily-journal-annual-meeting-part-2/

 

Q: Would you give us your thoughts on the Posco [PKX] position in the Daily Journal Portfolio?

 

Mr. Munger: It’s a very interesting example, as a matter of fact, that shows how hard the world is. That is the most efficient steel company in the world, and it had pretty close to a local monopoly of a whole country for a long, long time. In spite of that, in spite of having some very important steel technology they have that nobody else in the world has, Posco is selling like an ordinary commoditized steel company.

 

It’s very hard to avoid being commoditized in high powered competition in the modern world. In places like Dow Chemical [DOW], have all our complex chemical products commoditized in spite of the fact they’ve got thousands of PhD chemists, and people as talented and brilliant as the people who created Posco just find the markets low and the prices bad and so forth.

 

It shows how hard and dangerous it is to make money in a commoditized business, and how many businesses that you formerly thought were hugely advantaged can be commoditized. So, you’ve done a wonderful service to this meeting by raising the case of Posco. Posco’s an excellent example for everybody to think about. It really shows how hard it is.

[zenith]

Pabrai added 225% now has a 10% position size in the 1st quarter of 2015

 

http://whalewisdom.com/filer/dalal-street-llc

[mani2304]

It looks like Pabrai is betting on the exports

 

http://www.business-standard.com/article/reuters/posco-q1-profit-up-20-pct-low-iron-ore-costs-outweigh-weaker-steel-prices-115042100307_1.html

 

 

[karthikpm]

Did Pabrai just average down in prices on POSCO?

[jawn619]

No he sold his stake and then bought it back. Probably tax selling. He sure makes it hard for us to follow his advice of cloning and buying whenever 13fs come out...

[RadMan24]

Pabrai added 225% now has a 10% position size in the 1st quarter of 2015

 

http://whalewisdom.com/filer/dalal-street-llc

 

It's still below $58 ADR, some analysts on here have done their own conservative DCF and put it at $70.  Even then its 20% off their valuation for having a margin of safety. 

[Eye4Valu]

Did Pabrai ever discuss Posco at any of his annual meetings? Does anyone know his thoughts on the holding?

[sleepydragon]

Does anybody know if Berkshire still hold Posco?

[rishig]

Did Pabrai ever discuss Posco at any of his annual meetings? Does anyone know his thoughts on the holding?

 

Pabrai doesn't talk about his current holdings.

[mani2304]

He talked about POSCO last annual meeting 2014

 

http://bitsbusiness.com/investing-2/pabrai-investment-funds-annual-meeting-notes-2014/

[zenith]

yes buffet still owns Posco, just not Charlie Munger  :-\

see orginal article below

 

SEOUL, April 14 (Yonhap) -- Berkshire Hathaway Inc., led by U.S. billionaire investor Warren Buffet, has said it still owns "a considerable amount" of POSCO shares, denying rumors it sold off its entire stake in South Korea's top steelmaker, according to POSCO on Tuesday.

The steelmaker said Buffet recently replied to an e-mail from its IR division, which asked if Berkshire Hathaway had sold its entire holding in POSCO, saying that the company had not sold off its POSCO stocks.

POSCO shares plummeted sharply earlier this month, following media reports that Berkshire Hathaway's stock sell-off might have been prompted by concerns over the South Korean steelmaker's cloudy business outlook.

Berkshire Hathaway made public in 2007 that it bought a 4.6 percent stake in POSCO and its holding once increased to 5.2 percent. When Buffet visited South Korea in 2011, he reportedly praised POSCO as an "incredible steel company."

POSCO is under pressure from a protracted slump in the global steelmaking industry. It posted a nearly 60 percent plunge in net profit last year.

The steelmaker has also been facing a prosecution investigation into slush funds and other corruption allegations. Experts worry that the ongoing group-wide probe could significantly hurt its brand image, possibly having a negative impact on its future business.

POSCO closed at 254,500 won on the Seoul bourse on Tuesday, up 0.2 percent from the previous session's end.

[Mephistopheles]

yes buffet still owns Posco, just not Charlie Munger  :-\

see orginal article below

 

SEOUL, April 14 (Yonhap) -- Berkshire Hathaway Inc., led by U.S. billionaire investor Warren Buffet, has said it still owns "a considerable amount" of POSCO shares, denying rumors it sold off its entire stake in South Korea's top steelmaker, according to POSCO on Tuesday.

The steelmaker said Buffet recently replied to an e-mail from its IR division, which asked if Berkshire Hathaway had sold its entire holding in POSCO, saying that the company had not sold off its POSCO stocks.

 

 

Seems a bit fishy to me. Buffett never comments on what he's buying or selling or holding if it's not publicly disclosed. Also seems tacky that a company would email him to ask.