On Mar 28, 2014, we issued an updated research report on Gerdau S.A. (GGB), anticipating the company to perform in line with the broader market. The main highlight of the report was the company’s stellar performance in fourth-quarter 2013.
The Brazilian steel producer reported net income of R$491.6 million (US$216.6 million), up 244.1% year over year. Earnings per American Depositary Receipt were 13 cents. Net revenue increased 14.8% to R$10,321.0 million (US$4,546.7 million) on the back of improved contribution from all business operations. Steel production increased 6% while shipments were up by 5.5%.
According to the World Steel Association, the steel industry is likely to see steel consumption grow by 3.3% in 2014. The domestic market for Gerdau will get a boost as Brazil prepares to host major sporting events in the coming years and make major investments in infrastructure including the development of ports, railroads, airports, wind farms and roads, among others. In North America, rise in construction spending will likely drive steel demand in the region.
To leverage benefits from the rising steel demand, Gerdau has planned investments to improve manufacturing techniques and capacity and is aiming to attain self-sufficiency in raw materials. Efforts are being made to increase production of flat steel and iron ore in Brazil, enhance special bar quality in Brazil and the United States and special steel in India. An investment worth R$8.5 billion has been planned for the 2013−2017 time period.
Despite bright long-term growth prospects, concerns surrounding Gerdau in the near-term have forced us to maintain a balanced view on Gerdau. Risks emanating from higher cost of sales, increasing competition, disruptions in supply of raw materials and foreign currency fluctuations pose a threat to the growth of Gerdau.
Stocks That Warrant a Look
Gerdau currently has a market capitalization of $10.6 billion and carries a Zacks Rank #4 (Sell). Some better-ranked companies in the industry include Gibraltar Industries, Inc. (ROCK), General Steel Holdings, Inc. (GSI) and Ossen Innovation Co., Ltd. (OSN). While Gibraltar Industries carries a Zacks Rank #1 (Strong Buy), General Steel Holdings and Ossen Innovation hold a Zacks Rank #2 (Buy).