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Posco Holdings Inc ADR(PKX-N)
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Why Posco Stock Surged 17% Today

Motley Fool - Mon Jul 24, 2023

What happened

Shares of Korean steel company Posco Holdings(NYSE: PKX) leaped 17.2% on Monday morning (through 11:35 a.m. ET) despite Posco reporting steep declines in revenue, operating, and net earnings for its fiscal third quarter 2023.

Sales for the quarter were 20.1 trillion Korean won (KWN) or $15.7 billion, down 12.6% year over year. Operating profits plunged 38.1% to 1.3 trillion KWN, or $1 billion. Net income fell 55.6% to 800 billion KWN -- $625 million.

So what

Market watchers, however, were exuberant over the results, with Bloomberg calling Posco's quarterly profits "strong" -- and a surprise to short-sellers, who had expected worse numbers from the steelmaker. Korean investment firm Billionfold Asset Management agreed, with CEO An Hyungjin averring that "short covering is partly driving the rally."

It doesn't hurt that Posco is also jumping on the electric vehicle train, saying that it plans to invest $92 billion through 2030 to diversify its business away from steel and into new technologies such as rechargeable battery materials and hydrogen for fuel cells.

And investors seem to like this idea quite a lot.

Now what

So on the one hand, this appears to be a story of "right place, right time." Bloomberg notes that in Congress, legislators have begun an investigation of Ford's (NYSE: F) relationship with Chinese battery powerhouse Contemporary Amperex Technology Co. Investors are wondering if Ford's CATL partnership may fall apart and may be buying shares of Korean battery makers -- which Posco now arguably is -- to hedge against that risk on the assumption that Ford will still have to buy batteries from someone.

One risk that investors might want to pay closer attention to, however, is this plan of Posco's to spend $92 billion over seven years on transforming itself into a battery company. That works out to more than $13 billion a year -- for a company that was already struggling to remain free cash flow positive with annual capital spending of only $4.2 billion (over the last 12 months).

Posco's bet may eventually pay off. But investors need to start preparing themselves for the prospect of seeing years of cash burn before it does.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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