Sachs recommends buy for TK stock despite S&P credit cut

Sachs recommends buy for TK stock despite S&P credit cut

According to a recent report released by Goldman Sachs commenting on the credit rate downgrading of ThyssenKrupp of Germany, the emphasize is on the contradiction of the company being less attractive due to this rate cut despite its financially strong position. It is expressed that the stock is worth buying under such circumstances. The reason of such recommendation that lies beneath is ThyssenKrupp's increasing cash returns and changing philosophy, impacts of which having already come up in the form of reduction of net payables by € 4 billion over the last three years. Goldman Sachs rather believes in the market's overreaction to the credit cut by Standard & Poor's than that the company's fundamentals deteriorated. It is found surprising that the stock is trading at low levels at a time when the balance sheet of the company is the strongest of its history, with a regular positive operating cash flow. It is believed that the debt downgrading will intensify the management's capital discipline even further. The risk is there if a collapse of steel pricing, which is still the driver of ThyssenKrupp's earnings, is experienced. Based on steel production figures by IISI, according to Goldman Sachs, the peak effective steelmaking capacity globally is 960 million tons. This suggests 7 percent overhang, which continues to be eaten up by rising steel consumption. Expecting the continuation of last year's 28% increase of Chinese consumption to extend into 2003 might be deceptive as it can be estimated that stock levels are high China. The report states an expectation of over 12% industrial production growth in China this year. Depending on the intensive usage of steel in the country and the tight availability of the raw materials, a correction of prices in the region can be expected as nothing more than only a pause.