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On Jun 21, 2013, we downgraded steel producer, Gibraltar Industries Inc. (ROCK - Analyst Report), to Underperform from Neutral based on the company’s dismal first quarter results.

Why the Downgrade?

Gibraltar reported weak results for the first quarter of 2013, with earnings per share falling 55.6% year over year to 4 cents. It missed the Zacks Consensus Estimate of 12 cents by 66.7%. The decline is attributed to poor seasonal variations, customers’ inventory control as well as reduced prices of its products.

Revenues for the quarter rose by 2.4% year over year to $196.8 million, on the back of acquisitions. The business of Gibraltar depends on the expenditure incurred by its customers. However, an inventory control undertaken by the customers due to a prolonged winter reduced the revenue generation for Gibraltar.   

Gibraltar’s product prices experienced a decline in the last quarter. This resulted in a lower gross margin on a year-over-year basis after shipping an equivalent volume of commodities. Moreover, the company is expected to reduce its prices as the cost of raw materials drop.

In the reported quarter, sales from North America were down 4.6%, while those from Europe slid 18.7%, led by lower pricing, soft demand and a highly competitive market. It is expected that the industrial weakness experienced by Gibraltar in the first quarter of 2013 will continue through the third quarter.

Gibraltar is exposed to customer concentration risks as well, deriving a large portion of its sales from only a handful of customers. Moreover, the company does not have long-term contracts with its customers, which may lead to termination of purchase causing a severe loss to the business.

Other Stocks to Consider

Gibraltar currently carries a Zacks Rank #5 (Strong Sell). However, not all steel producers are performing as badly as the company. Shiloh Industries Inc. with a Zacks Rank #1 (Strong Buy), L.B. Foster Co. (FSTR - Analyst Report) and Sutor Technology Group Limited , carrying a Zacks Rank #2 (Buy) each, look attractive and are worth considering at the moment.

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