POSCO Holdings: Undervalued Steel Giant with Green Growth Potential

POSCO Holdings (PKX) stands at a pivotal crossroads: its traditional steel business faces near-term headwinds, yet its strategic pivot to green materials and global partnerships positions it for long-term growth. With a compelling valuation, improving financial metrics, and a clear path to capitalize on EV and semiconductor trends, this Korean industrial powerhouse deserves investor attention.

Undervalued on Multiple Fronts

POSCO's valuation metrics paint a picture of a stock trading below its intrinsic worth. As of June 2025, its EV/EBITDA ratio of 6.29 is significantly below the steel industry median of 行9.53, ranking it in the top 28% of its sector in terms of affordability. Meanwhile, its P/E ratio of 24.09 reflects near-term earnings pressures but remains within its five-year range, suggesting the market isn't pricing in long-term upside.

The company's strong free cash flow (FCF margin of 324.37%) and manageable debt (leverage ratio of 1.79x) further bolster its financial resilience. These metrics, combined with a market cap of $12.72 billion versus an estimated “fair value” of $16.2 billion (per Snowflake Score), indicate a stock trading at a 23.8% discount to its potential.

Growth Catalysts: From Steel to Green Materials

While steel remains POSCO's core business, its declining margins (1.2% in 2024) and U.S. tariff challenges highlight the need for diversification. Here, the company's shift to green materials and battery technologies emerges as its key growth lever:

1. EV Battery Materials:
2. POSCO Future M, its battery materials subsidiary, is a linchpin. A $1+ billion joint venture with GM aims to produce cathode materials in North America, directly addressing EV supply chain demands.

3. Piloting solid-state battery cathodes and lithium metal anodes positions it to lead next-gen battery tech, with mass production targeted by 2028.

4. Strategic Partnerships:

5. A memorandum of understanding with Hyundai for a U.S. steel plant bypasses tariff risks while securing a foothold in the North American market.

6. Collaboration with India's JSW expands its footprint in Asia, leveraging emerging EV demand.

7. Semiconductors and Rare Gases:

8. A new venture to produce rare gases (e.g., helium, argon) for semiconductors taps into a high-margin, high-demand sector.

Competitive Advantages

• Operational Efficiency: Q1 2025 saw operating profit rise 16.7% YoY, despite lower revenue, signaling cost discipline.
  
• Innovation Edge: Hydrogen-based steelmaking and carbon-neutral initiatives align with ESG trends, attracting sustainability-focused investors.
• Global Diversification: Reduced reliance on China's volatile steel demand, with growth pivoting toward India, the U.S., and EV supply chains.

Risks and Challenges

• Trade Tensions: U.S. tariffs on steel and regulatory hurdles for battery materials (e.g., graphite imports) remain risks.
• Margin Pressures: Steel prices and lithium/nickel volatility could delay profit recovery.
• Execution Risk: Success hinges on timely ramp-up of new plants and tech (e.g., lithium projects in Argentina and Chile).

Investment Thesis

POSCO is a contrarian buy for investors with a 3–5 year horizon. Key catalysts include:
1. A rebound in global EV demand, driving battery material sales.
2. Cost savings from restructuring projects (targeting KRW 2.1 trillion in cash by 2025).
3. Valuation re-rating as EV and green material divisions gain traction.

Historically, however, a strategy of buying PKX when quarterly operating profit grew YoY and holding for the next quarter underperformed, with a maximum drawdown of 51.5% and a -2.26% CAGR from 2020 to 2025. This underscores the need for patience and a long-term focus, as near-term volatility may persist.

Conclusion

At current prices, POSCO offers a rare blend of undervaluation and growth potential. While short-term risks exist, its strategic moves into green tech, strong balance sheet, and geographic diversification suggest it's primed to outperform. Investors should consider adding this stock to portfolios focused on industrial innovation and ESG-aligned opportunities.

Recommendation: Buy PKX with a target price of ₩120.18 (vs. current ₩47.24) over the next 24 months, supported by EV/EBITDA expansion and margin recovery.

Disclaimer: Past performance is not indicative of future results. Always conduct your own research or consult a financial advisor before making investment decisions.