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Companhia Siderurgica's Potential Overshadowed by Risks

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We issued an updated research report on Companhia Siderurgica Nacional (SID - Free Report) or CSN on Aug 18, 2016. The company is one of the leading steel producers in Brazil.

Over time, Companhia Siderurgica Nacional has been reaping benefits from its diversified business structure, with exposure in steel, iron ore mining, logistics, cement and energy industries. In second-quarter 2016, roughly 37.6% of the company’s total revenue was sourced from non-steel businesses while investments have been planned for the expansion of the non-core operations. In addition, the company’s geographical diversification and a wide array of products, including hot and cold-rolled flat steel, galvanized sheets and tin plates for the packaging, automotive and construction industries will bode well for it in the quarters ahead.

Despite such long-term advantages, Companhia Siderurgica Nacional has low investment ranking as it faces risks arising from near-term headwinds. Huge debt levels and higher costs and expenses, if left unchecked, will prove detrimental to the company’s profitability. Exiting second-quarter 2016, Companhia Siderurgica Nacional had approximately R$29 billion of long-term debt, resulting in 8.3x of net debt/EBITDA ratio. Moreover, the company’s international operations are subject to risks from unfavorable foreign currency translations.

In the recently reported second-quarter 2016 results, Companhia Siderurgica Nacional recorded loss as revenue growth was offset by increase in costs of sales and selling expenses. Crude steel production declined 55% year over year, while production of rolled steel decreased 35%. Also, steel sales volume decreased 1% year over year. We believe continued weakness in these parameters might be unfavorable for the company, going forward. In addition, world steel demand is projected to contract 0.8% while that in Brazil is likely to decline 14% year over year. Such contraction might adversely impact the company’s businesses.

Over the last 30 days, the Zacks Consensus Estimate for Companhia Siderurgica Nacional has widened from a loss of 25 cents per American Depository Receipt to a loss of 48 cents for 2016, and from a loss of 14 cents to 31 cents for 2017.

Zacks Rank & Stocks to Consider

With a $4.2-billion market capitalization, Companhia Siderurgica Nacional currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the steel industry include ArcelorMittal (MT - Free Report) , Schnitzer Steel Industries, Inc. and Gerdau S.A. (GGB - Free Report) . While ArcelorMittal and Schnitzer Steel Industries sport a Zacks Rank #1 (Strong Buy), Gerdau carries a Zacks Rank #2 (Buy).

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