We recently downgraded our recommendation on Companhia Siderurgica Nacional (SID), or CSN from Neutral to an Underperform rating based on the company’s near-term weaknesses.
CSN’s first quarter 2012 results were not impressive as the results were plagued by rising cost of materials, weak margins and lower profits. The company’s earnings in the quarter were just 4 cents per ADR, lagging behind both the year-ago earnings as well as the Zacks Consensus Estimate of 25 cents per ADR.
Moreover, rising competition and higher debt levels are the major impediments to growth. The steelmaker faces stiff competition from its peers including Mechel Oao ADS (MTL), Sumitomo Metal (SMMLF), Ternium SA-ADR (TX) and Commercial Metl (CMC).
Anticipating weakness throughout the year, we project 2012 earnings to be around 98 cents, down 35% year over year. Moreover, rising competition and higher debt levels still remain other major impediments to growth.
Despite the weak results and softness apprehended in the near term, we still remain confident about the company’s long-term growth prospects.
The company stands at an advantageous position to leverage from the growing world steel market. According to the World Steel Association, steel demand in the world is expected to surge 3.6% in 2012 and 4.5% in 2013. Growth has been occurring quite steadily in this sector as time passes.
Moreover, for the Brazilian steel industry business is looking up as demand soars and infrastructure investments are induced by a rise in government spending, as the country hosts the 2014 Soccer World Cup and 2016 Olympic Games.
Moreover, the company’s diversified portfolio is a boon; with non-core businesses including Mining, Logistics, Cement and Energy accounting for roughly 40% of revenues.
The stock currently bears a Zacks #5 Rank, translating into a short-term Strong Sell rating.
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