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We recently maintained our Neutral recommendation on Gerdau S.A. (GGB - Analyst Report), one of the leading steel producing companies in the world.

The steel-maker conducts its operations through 70 commercial branches in Brazil and has as many as 59 steel producing units worldwide, inclusive of joint ventures and associated companies. It is the second largest long steel producer in the world and the largest in the Americas.

Rising global demand along with an increase in Gerdau’s domestic demand for steel is a boon for the company. Needs for better farming techniques and infrastructure have stood the company in good stead, working as steel demand stimulators across the world.

Amidst recovering global economy, a slowdown in China and the prevailing Eurozone crisis are decelerating the overall growth process. Considering these near-term concerns, the World Steel Association projected apparent global consumption of steel to grow 2.1% in 2012 and 3.2% in 2013, reflecting downward revision from its prior forecast of 3.6% in 2012 and 4.5% in 2013.

The company’s results in the third quarter 2012 were affected as consolidated shipments declined due to prevailing weakness in the European region and slower growth in China.  Even Brazilian demand for steel, though got a boost from the infrastructure sector, failed to gain momentum from the residential and commercial buildings.

Net results in the third quarter were overshadowed by a 13% increase in cost of sales, which offset a 10% increase in net revenues. Net income went down by 43% to R$408 million (US$204 million) while EPADR came in at US$0.12 versus US$0.25 earned in the year-ago quarter.

 Further, a negative earnings surprise of 35.9% in the trailing four quarters and expectation of an 11.3% negative earnings surprise for 2012 and 5% for 2013 keep us on the sidelines for Gerdau. The company should also remain wary of other formidable players in the industry including Companhia Siderurgica Nacional (SID - Analyst Report) and Arcelor Mittal (MT - Analyst Report). Companhia Siderurgica Nacional posted net earnings of US$0.06 per ADR; ahead of the Zacks Consensus Estimate of US$0.01 per ADR.

The current Zacks Consensus Estimate for the fourth quarter is 15 cents, flat year- over-year. Estimates for 2012 and 2013 are 53 cents and 60 cents, respectively. These represent annual decline of 26.7% in 2012 and growth of 14.1% in 2013.

Gerdau currently bears a Zacks #3 Rank, implying a short-term hold rating.
 

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