POSCO (ADR) (PKX): This Company Looks Good for Value Investors, But Are There Drawbacks?

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An overlooked division?

POSCO does have an advantage that its competitors lack: It has a small but growing presence in the LNG business. While it might seem like an afterthought relative to its core steel and coking businesses, this division could prove to be important in the years to come. Since many industry observers expect natural gas to become more widely available on a global basis, POSCO’s international footprint could enable it to become a major supplier of the power source. If the price of natural gas remains low relative to that of conventional oil, this could be a huge boon for the business as a whole.

Perfect investment in a shaky commodity environment?

It is no secret that the commodities market has been in rough waters for the past few years. The price of copper has traded sideways for some time, and even “safe haven” metals like gold and silver have been creamed of late. The market for iron ore is no different: Despite worldwide closings of unprofitable mines and a general tightening of global supply, prices of the metal remain depressed. Given that the global economic recovery remains uneven at best, it is likely that this arrangement will continue in the foreseeable future.

While this environment might be unfavorable for mining companies, it could be a boon for firms like POSCO (ADR) (NYSE:PKX). With low raw material costs, the company is limited only by demand from its clients and the limits of its own production capacity. As long as China avoids a worst-case “hard-landing” scenario, POSCO’s mills should have no problem filling orders. On the other hand, a sudden spike in raw material costs due to increasing global demand or sharply tightening supply could justify POSCO’s seemingly unwarranted valuation. However, POSCO’s enviable safety margin ensures that such a spike would hit other producers even harder.

In sum, POSCO represents an excellent value play for investors who wish to gain exposure to the steel-making space. Although many observers favor the similarly undervalued ArcelorMittal, others have openly talked about the potential for POSCO’s market capitalization to double or even triple. With generally solid fundamentals and a diversified base of operations, POSCO could be an irresistible pick for value investors.

The article This Company Looks Good for Value Investors, But Are There Drawbacks? originally appeared on Fool.com and is written by Mike Thiessen.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of ArcelorMittal. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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