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Neutral Rec Reiterated on Gerdau

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We recently maintained our Neutral recommendation on Gerdau S.A. , one of the leading Brazilian companies producing steel.   

Why Neutral?

Prospects are bright for the steel industry as concerns related to the Eurozone crisis and instability in the U.S. and China are abating gradually creating more room for growth. This in turn requires better infrastructure and modernized farming techniques. According to the World Steel Association’s projection in Apr 2013, estimated global consumption of steel is likely to grow 2.9% in 2013 and 3.2% in 2014.

Domestic market for Gerdau will receive a boost as the country prepares to host major sporting events in the coming years while major investments in infrastructures are also planned for the development of ports, railroads, airports, wind farms and roads, among others. In North America, recovering GDP and revival in construction spending will likely spur steel demand in the region.

We believe the Brazilian steel industry is well positioned to leverage the rising wave of worldwide infrastructural requirements and is also expected to keep up with the demand growth in the short-to-medium term.

Talking of Gerdau, the company has as many as 88 commercial branches in Brazil and 59 steel producing units worldwide. To cope with the rising steel demand, the company plans to invest roughly R$8.5 billion to improve its manufacturing techniques and capacity, and to attain self-sufficiency in raw materials.

Despite bright long-term growth prospects, concerns surrounding Gerdau in the near-term have forced us to remain on the sidelines for Gerdau. The company over the trailing four quarters has posted year-over-year decline in its net income, with roughly 27% reported for the second quarter 2013. Revenue was also down by 0.9%. Steel production was weak in all operating regions and fell 8% year over year. Shipments declined by 3% in the quarter.

Further, risks emanating from higher cost of sales, increasing competition, disruptions in the supply of raw materials and foreign currency fluctuations among others, pose a threat to the growth of Gerdau.

Others Stocks to Consider

Gerdau currently has a market capitalization of $11.9 billion and carries a Zacks Rank #3 (Hold). Other stocks to watch out for in the industry are Nippon Steel & Sumitomo Metal Corporation , with a Zacks Rank #1 (Strong Buy) while Ternium S.A. (TX - Free Report) and Kobe Steel Ltd. , each come with Zacks Rank #2 (Buy).

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