Brazil's Gerdau a Buy Up to $55

We are upgrading our recommendation on Brazilian steelmaker Gerdau S.A. ( GGB - Analyst Report) to Buy from Hold, after the company posted excellent results in the first quarter. Gerdau has been benefiting from rising steel prices, despite a challenging international economic environment in recent months.

Continued demand for steel from China, a strong Brazilian economy, and its strategy to grow through acquisitions create a positive environment for Gerdau. Despite the recent hike in the interest rate, we believe the Brazilian economy remains encouraging, mainly after being upgraded to investment grade by Standard & Poor’s. Gerdau’s investments in different companies should also generate huge revenues and earnings growth in the following years.

The steel industry trades at a discount to the S&P due to risks of a slowdown in the U.S., increasing Chinese production and rising prices for raw materials and energy. The continued strength of the Brazilian real and more recently, the company’s exposure to the U.S. housing industry have become sources of high concern. Despite these problems, we believe Gerdau should trade at a premium, and we have a target price of $55 on the stock.

Read the full analyst report on GGB