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On Sep 17, 2013, we downgraded our recommendation on Gibraltar Industries Inc. (ROCK - Analyst Report) to Underperform from Neutral, based on weak industrial market outlook.

Why the Downgrade?

Gibraltar Industries has been facing a downturn in its industrial end market over the past few quarters. In the second quarter of 2013, the industrial market faced a decline of 10% year over year (excluding acquisitions). This decline pulled down the total revenue as well as margins for the quarter. Gibraltar Industries uses steel as its main raw material. However, as the prices of steel move down, the company is also expected to reduce its prices, which makes it challenging to increase margins.

The residential repair and remodeling activities, that constitute a major portion of the company’s revenues, also performed below expectations in the second quarter of 2013. The decline was primarily a result of unfavorable weather conditions and home-owners’ reluctance to go for remodeling projects. The revenue generation from the residential repair and remodeling activities for 2013 are now expected to be flat year over year, against an earlier expected hike of 2% to 5%.

Gibraltar Industries derives a major portion of its revenues from only a handful of customers (36% of total revenue in 2012). Moreover, the company does not have long-term contracts with its customers, leading to a possibility of termination of the purchase. The loss of any of these customers may lead to a severe decline in the company’s revenues.

Due to Gibraltar Industries’ worldwide presence, the company is exposed to various international risks such as foreign currency risks, various environmental and economical laws as well as cultural diversity of the countries.

The Zacks Consensus Estimate for 2013 has dropped 27.4% in the last 60 days to 61 cents per share, reflecting an estimated year-over-year decline of 5.6%. For 2014, the Zacks Consensus Estimate declined 14.6% during the same period to $1.05 per share, reflecting a year-over-year growth of 71.6%.

Other Stocks to Consider

Gibraltar Industries currently carries a Zacks Rank #4 (Sell). Other stocks worth a watch in the steel sector are Companhia Siderurgica Nacional (SID - Analyst Report), Northwest Pipe Co. (NWPX - Snapshot Report) and Gerdau S.A. (GGB - Analyst Report). While Companhia Siderurgica and Northwest Pipe carry a Zacks Rank #1 (Strong Buy), Gerdau carries a Zacks Rank #2 (Buy).

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