We maintained our Neutral recommendation on, Companhia Siderurgica Nacional (SID - Analyst Report), or CSN as the long-term growth prospects get marred by our near-term concerns.
By and large, the growth prospects of the steel industry seem to be bright. With the global economy reviving gradually, demand for better infrastructure and agricultural needs is also soaring which, in turn boosts demand for steel worldwide. As projected by the World Steel Association, the apparent global steel consumption is expected to increase 3.2% in 2013.
The Brazilian steel industry is no exception; as steel demand in Brazil has been increasing with the country gearing up to host two major sporting events; the 2014 Soccer World Cup and 2016 Olympic Games. Also, huge government investments to improve infrastructure and manufacturing and construction industries are fueling steel demand.
We find CSN well equipped to leverage benefits from the growing steel market in the domestic as well as the international arena. The company has been making investments to improve its production capabilities and services. Total capital spending is expected to be R$3.1 billion in 2013.
Despite these positives, near-term concerns and financial performances keep us on the sidelines for CSN.
CSN posted weak financial results for the fourth quarter 2012 with net income falling 61% year over year. Cost of sales rose 47%, offsetting revenue increase of 10% in the quarter. Moreover, the prevailing weakness in the European market, slow growth in China and sluggish growth in the United States are impacting the steel industry worldwide.
Other Stocks to Consider
CSN is one the recognized Brazilian steel makers and currently has a market capitalization of US$6.5 billion. Other stocks to watch out for in the industry are Shiloh Industries Inc. , Gibraltar Industries, Inc. (ROCK - Analyst Report) and Nippon Steel & Sumitomo Metal Corporation (NSSMY), each holding a Zacks Rank #1 (Strong Buy).