We recently reiterated a Neutral recommendation on Companhia Siderurgica Nacional (SID), or CSN, a renowned Brazilian steel maker.
Growth seems to be on the cards for the steel industry as concerns related to the Eurozone crisis and instability in the U.S. and China are abating gradually. This, in turn, is creating more demand for better infrastructure and modernized farming techniques.
According to the World Steel Association’s projection in Apr 2013, estimated global consumption of steel is likely to grow 2.9% in 2013 and 3.2% in 2014.
Domestic market for CSN is expected to receive a boost as the country prepares to host major sporting events in the coming years while major investments in infrastructures are also planned for the development of ports, railroads, airports, wind farms and roads, among others. The Brazilian Steel Institute (IABr) predicts steel sales in Brazil to increase 7.7% in 2013.
We believe the long-term growth prospect of CSN is very bright as the company seems well positioned to leverage benefits from the growing steel demand worldwide. Investments for improvement in production capabilities and services have also been planned. On a consolidated basis, total spending in 2013 is expected to be R$3.1 billion.
Despite being positive about CSN’s long-term growth prospects, we find near-term risks emanating from higher cost of sales, increasing competition, disruptions in the supply of raw materials and foreign currency fluctuations among others, to be disquieting.
A look into the second quarter 2013 results shows that cost of goods sold in the quarter rose 12.4% year over year while selling expenses, as a percentage of net revenue, increased by roughly 220 basis points (bps) year over year.
The Zacks Consensus Estimate for CSN currently stands at a loss of US$0.05 per ADR, reflecting a decline of 183.3% year over year. Earnings estimate are at a loss of US$0.06 per ADR for 2013 and at earnings of US$0.01 per ADR for 2014.
Others Stocks to Consider
CSN currently has a market capitalization of roughly $5.6 billion and holds a Zacks Rank #3 (Hold). Other stocks to watch out for in the industry are Nippon Steel & Sumitomo Metal Corporation (NSSMY), with a Zacks Rank #1 (Strong Buy) while Angang Steel Company Limited (ANGGY) and Ternium S.A. (TX), each come with a Zacks Rank #2 (Buy).
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