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CSN Upgraded to Neutral

SID

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We recently upgraded our recommendation on Companhia Siderurgica Nacional (SID - Analyst Report), or CSN from Underperform to Neutral based on the company’s long-term growth prospects.

The Brazilian company primarily engages in the production of hot- and cold-rolled flat steel, galvanized sheets, and tin plates for the packaging, automotive, and construction industries.

It is extremely clear that steel producers enjoy an advantageous position to leverage from the growing world steel market. According to the World Steel Association, steel demand in the world is expected to surge 3.6% in 2012 and 4.5% in 2013. Growth has been occurring quite steadily in this sector as time passes.

Moreover, the Brazilian steel industry is expected to get a boost from rising demand from the manufacturing and construction industries; infrastructure investments induced by a rise in government spending, and demand increase as the country hosts the 2014 Soccer World Cup and 2016 Olympic Games.

Moreover, the company’s diversified portfolio is a boon; with non-core businesses including Mining, Logistics, Cement and Energy accounting for roughly 40% of revenues.

CSN’s first quarter 2012 was not impressive as the results were plagued by rising cost of materials, weak margins and lower profits. Earnings in the quarter were pulled down to just 4 cents per ADR, lagging behind both the year-ago earnings as well as the Zacks Consensus Estimate of 25 cents per ADR. Moreover, rising competition and higher debt levels are the major impediments to growth.

Despite the weak results and softness due to the Eurozone debt crisis, we believe the growth outlook of Companhia Siderurgica is encouraging.

The current Zacks Consensus Estimate for the second quarter is 11 cents, representing a year-over-year decline of 77.08%. Estimates for the fiscal years 2012 and 2013 are $1.02 and $1.75, reflecting annual decline of 26.38% and growth of 70.52%, respectively.

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