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Gerdau a Brazilian Value Buy

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We are keeping our Buy recommendation on Gerdau S.A. ([url=]GGB[/url]). The company has been posting good results, and the second quarter 2008 results were excellent. Moreover, high steel prices, the continued high demand for steel in China, the good economic environment in Brazil, and the company’s continued acquisitions of smaller steel producers creates a positive environment for Gerdau.

However, the international economic environment for commodity stocks is deteriorating due to high inflation and interest rates throughout the world and a possible recession in the U.S. Nevertheless we still have a positive outlook for Gerdau, mainly considering its attractive valuation.

The company’s continued investments in different companies should generate huge revenues and earnings growth in the following years. Demand for commodities in general and steel in particular is usually influenced by worldwide economic activity and infrastructure investments. According to the International Iron & Steel Institute, world steel demand in 2008 will continue to grow around 6% to 7%. Additionally, a 100% stock split took place on May 30, which capitalized R$1.7 billion reserves.

Gerdau has been expanding internationally in order to reach new markets. During the second quarter of 2008, Gerdau closed an acquisition of MacSteel, steel operation of Quanex Corporation for $1.5 billion plus the assumption of debt and certain liabilities of approximately $200 million.

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