Among the leading steel producing companies in the world, Gerdau S.A. (GGB) has been recently downgraded by us from Neutral to an Underperform recommendation.
Recovery in economic health worldwide is a definite sign of boosting demand for better farming techniques and infrastructure. According to the World Steel Association, the steel industry is likely to see steel consumption grow by 3.6% in 2012 and 4.5% in 2013. Steel demand in China and India remains strong. However, weakness arising from the Eurozone debt crisis has stalled growth and hence demand for steel is weak in the region.
Gerdau in the first quarter 2012 reported a 4% year-over-year increase in steel production to satisfy growing demand in North America and is undergoing restocking activities to meet future needs. Shipments were, however, flat, as growth in North America and Latin America were offset by declines witnessed in Brazil and Special Steel business.
Results were plagued by higher cost of sales that more than negated the impacts of revenue increase in the quarter. Net income plummeted 3% with earnings per ADR falling 3 cents year over year to settle at 13 cents in the quarter. Revenue increased 10% while raw material costs rose 12.4%. Margins weakened with gross margins plummeting by 2% and operating margin by 1.6% year over year.
To add to the peril, Gerdau's growth momentum gets restricted by the headwinds arising from foreign currency fluctuation, cyclicality of the industry and stiff competition from its peers including other major steel majors like Companhia Siderurgica Nacional (SID) and Arcelor Mittal (MT).
The current Zacks Consensus Estimate for the second quarter is 19 cents, representing a year- over-year decline of 5.0%. Estimate for the fiscal years 2012 and 2013 are 71 cents and $1.03, respectively. These represent annual decline of 1.94$ in 2012 and growth of 46.25% in 2013.Read the Full Research Report on SID
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