June 15, 2010 / 12:41 PM / 10 years ago

BUY OR SELL-Can ThyssenKrupp pass on costs to clients?

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* Bulls see sales growth and restructuring boost

* Bears see risks from rising raw material prices

By Marilyn Gerlach

FRANKFURT, June 15 (Reuters) - ThyssenKrupp (TKAG.DE), Germany’s biggst steelmaker, is seeking price increases for third-quarter deliveries amidst a declining price trend in China, the world’s top steel producer. [ID:nLDE65D1QS]

How well it succeeds at a time of rising raw material prices and a demand slowdown in Europe — as restocking slows while the euro zone’s debt problems shake the steel industry — will help determine whether its shares can extend recent gains.

ThyssenKrupp shares have fallen nearly 15 percent in the past three months but have gained 7.6 percent year-on-year after a 5.7 percent rise in the last five trading days, outpacing the German blue-chip index’s 4.4 percent rise.

They trade at around 10.8 times 2011 earnings per share, a premium to steel market leader Arcelor Mittal ISPA.AS at nearly 8 times, according to Thomson Reuters data.


Citi analyst Anindya Mohinta said he was upgrading his stance on ThyssenKrupp’s shares to “buy” from “hold”, noting they were worth at least 28 euros.

“We expect (ThyssenKrupp’s) earnings growth to outpace the sector by 15 percent over the next two years as organic growth and restructuring measures kick in,” Citi said in a note.

“We think the recent sell-off in (ThyssenKrupp’s) shares more than factors in the earnings downgrade risk for the second half of 2010,” Mohinta said.

MM Warburg, which also has a “buy” recommendation, said the market was overestimating margin pressure as a result of higher raw material costs.

“The devaluation of the euro has no additional negative effect in the purchase of raw materials on the one hand, while the on the other hand it may stimulate exports and reduce risks through imports,” MM Warburg said in a note to clients.


Hamburger Sparkasse analyst Ingo Schmidt said he expected further increases in prices of iron ores and coking coal.

“What is important is to what extent ThyssenKrupp will be able to pass on its costs to customers,” Schmidt said.

“Our opinion is that it will not be able to completely pass these on to clients,” he added.

“There is also the risk of Chinese exports to Europe.”

ESN, which has a “reduce” recommendation, said risks were still outweighing opportunities, with its bearish case based on a potential setback in the economic recovery as well as the company’s execution of a steel output ramp-up in the Americas.

Although ThyssenKrupp has said it would be able to pass on higher raw material costs to customers, “a certain time lag in annual contracts will lead to a margin squeeze” with the fourth quarter marking the low point, ESN said. (Reporting by Marilyn Gerlach; Editing by Michael Shields)

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