We recently maintained our Neutral recommendation on Gerdau S.A. (GGB), one of the leading steel producers in Brazil.
Long-term growth prospects of Gerdau are quite remarkable. The company has as many as 88 commercial branches in Brazil and 59 steel producing units worldwide. Presently, Gerdau is the second largest long steel producer in the world and the largest in the Americas.
As the global economy is rebounding from the lows experienced post the 2008 crisis, demand for better infrastructure and emphasis on modernizing farming techniques is likely to spur demand for steel in both developed as well as emerging and developing countries. Talking of Brazil, future of the steel market is strong as the country prepares to host major sporting events in the years to come.
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. Gerdau has allocated an amount equal to R$8.5 billion for investments during the years 2013-2017. Also, the company is working hard to increase production of flat steel in Brazil, special bar quality in Brazil and the United States, special steel in India, and iron ore in Brazil. Moreover, investments are made in mineral resources and logistics.
Despite these positives, concerns surrounding the stock in the near-term have forced us to maintain a neutral stance on Gerdau. A glimpse into the recently reported first quarter 2013 results shows that net results plummeted 60% year over year as revenue generation was weak in the quarter, particularly from the company’s North American operations and Specialty Steel business.
Rise in cost of sales impacted gross margin which together with higher operating expenses and fall in equity in earnings of unconsolidated companies, adversely impacted operating income. Steel production was weak in all operating regions and fell 11% year over year. Shipments declined by 4% in the quarter.
Further, risks emanating from increasing competition, disruptions in the supply of raw materials, foreign currency fluctuations, among others pose threat to the growth of the company.
Others Stocks to Consider
Gerdau currently has a market capitalization of $11.1 billion and carries a Zacks Rank #4 (Sell). Other stocks to watch out for in the industry are LB Foster Co. (FSTR), Angang Steel Company Limited (ANGGY) and ArcelorMittal South Africa Limited (AMSIY), each with a Zacks Rank #2 (Buy).
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