Fool's Eye View

[ June 26, 2000 ]

No Songs Of Praise For Corus

By Maynard Paton (TMFMayn)

Carburton Street, London -- I know it's a well-worn cliche, but let's consider "old economy" companies. What comes to mind? Retailers? Airlines? Or how about banks or breweries? All four are traditional types of businesses that have are having a tough time of late. But for me, when it comes to the so-called "old economy" companies, there's none older than Corus Group (LSE: CS.), the steel manufacturer.

Corus was formed through the merger of British Steel and the Dutch firm Hoogovens last Autumn. Today, the enlarged group published its first set of results, covering the six months to 1st April 2000.

                          6 months to         6 months to
                           01/04/2000          02/10/1999


Sales (£m)                   4,611                2,709


Operating loss (£m)           (132)                (189)


Loss before tax (£m)          (113)                (167)

If you're anything like me, then you don't really need to delve too deeply into the financials to determine whether Corus are suitable business for a long-term investment. And that's quite a relief too, as Corus fail to provide any pro-forma results (the combined figures of British Steel and Hoogovens before the merger) for a straightforward comparison to today's numbers. Also, interpreting the differing sales performances of "tubular products" and "wire rods" isn't a task to be taken lightly either.

Anti-Buffett

Corus is the archetypal anti-Buffett company. Whereas legendary investor Warren Buffett looks for businesses that have a sustainable differentiation between themselves and the competition, coupled with low reinvestment requirements, Corus is anything but.

Corus manufacturers a commodity product and constantly fights against cheap foreign imports for business. The group also requires large doses of capital expenditure to keep the furnaces up to scratch just to remain in the industry, let alone remain competitive.

Not only does Corus always have those two industry millstones around its neck, another problem is causing havoc on the group's accounts -- the weak Euro. After the merger with Hoogovens, over half of the group's revenues are now from Continental European customers. According to Corus, "the continuing strength of the Pound against the Euro dominated the commercial scene through the combined effect of demand being held back with limited scope for price increases".

Compare the former British Steel carbon steel manufacturing operation, with losses of £200m in the last three half-yearly periods, to the aluminium business of Hoogovens. The fact that the Dutch side of the business can make a 10% operating margin on turnover of £460m speaks volumes on the importance for commodity businesses to have operating expenses and sales largely denominated in the same currency.

Is there an investor out there who can sing the praises of Corus? I certainly can't. A low-return commodity metal-basher at the whim of currency fluctuations doesn't make for an enticing predictable long-term investment. Unless you can predict foreign exchange movements and the steel manufacturing cycle, Corus is best left alone for "ancient economy" investors.

Related Links

• Corus discussion board
• Corus Interim Results