SID Upgraded, Rated Neutral

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

With the world economy reviving, it is extremely clear that steel producers will enjoy an advantageous position to leverage from the growing demand for better infrastructure and agricultural needs. According to the World Steel Association, steel demand is likely to surge 3.6% in 2012 and 4.5% in 2013.

Prospects for the steel industry in Brazil are growing increasingly brighter as the country is gearing up to host two major sporting events, the 2014 Soccer World Cup and 2016 Olympic Games. Moreover, the Brazilian steel industry is expected to get a boost from rising demand from the manufacturing and construction industries and infrastructure investments induced by a rise in government spending.

CSN, a Brazilian company with a market capitalization of $7.55 billion, primarily engages in the production of hot- and cold-rolled flat steel, galvanized sheets, and tin plates for the packaging, automotive, and construction industries. We believe the company is in a position to benefit from the rising steel demand in the domestic as well international markets.

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.

Despite the long-term growth prospects, near-term uncertainties keep us on the sidelines for the company. The company’s second quarter of 2012 was not very impressive as CSN’s net results plunged into losses amounting to R$1.05 billion as against earnings of R$1.14 billion in the year-ago quarter. Loss per ADR came in at US$0.37; way behind the Zacks Consensus Estimate of earnings of US$0.04 per ADR. Revenues plunged 4% which along with a 20% rise in cost of sales pulled down gross margin by 14%.

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 third quarter 2012 is 8 cents, representing a year-over-year decline of 81.82%. Estimates for 2012 and 2013 are 46 cents and 93 cents, reflecting year-over-year growth of (67.15%) and 103.65%, respectively.

The company currently bears a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating.