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We issued an updated research report on Brazilian steelmaker, Gerdau S.A. (GGB - Free Report) on Aug 17.

Healthy demand for steel in the domestic and international arena as well as potential benefits from strategic initiatives and diversified business structure has made it an attractive choice for investors seeking exposure in the steel industry.  

Market sentiments have been favoring Gerdau since the beginning of 2017. Its American Depository Receipts have yielded +12.7% return year to date, higher than 5.3% gain recorded by the industry it belongs to.

Here’s why Gerdau seems to be an attractive pick:

Strengthening Steel Demand: We believe that improving steel demand will create lucrative business conditions for Gerdau in the quarters ahead. On the domestic front, any investment by the government in infrastructure improvements and demand expansion in China, India, Southeast Asia and other emerging nations will be promising. Per the World Steel Association report, the global steel consumption is predicted to grow 1.3% year over year in 2017.

Steel consumption in Brazil will likely grow 2.8%. Heavy steel demand is anticipated from the wind energy industry and the automobile sector.  

Strategic Initiatives: Improvement in production capabilities is a priority for Gerdau. Investments worth R$1.3 billion has been planned for 2017. Efforts are being made to increase production of flat steel and iron ore in Brazil, special bar quality in the United States and Brazil, and special steel in India. In addition, investments have been planned to improve the company’s mineral resources and logistics.

In addition, to optimize use of its resources and improve profitability, the company believes in buying meaningful businesses or disposing its loss-making assets. Notably, it divested its business unit, Premier Thermal Solutions, L.L.C in March. In the same month, its formed a joint venture with Putney Capital Management.

Diversification Benefits: We believe Gerdau’s well-diversified product portfolio will help it grow in the quarters ahead. The company produces crude steel, including slabs, blooms, billets and flat steel as well as engages in iron ore mining activities. These products are used in various industries including construction, wind power, machinery and equipment, agricultural, highway, shipbuilding and oil and gas industries.

Furthermore, international diversity has played a major role in Gerdau’s profitability over time. Notably, in second-quarter 2017, it derived nearly 32.5% of net revenue from its Brazilian operations while roughly 51.7% came from North and South American business operations.

Zacks Rank & Other Stocks to Consider

Gerdau currently has $6.1 billion market capitalization. We believe that the above-mentioned positives clearly justify the stock’s current Zacks Rank #2 (Buy).

Other stocks worth considering in the same space include POSCO (PKX - Free Report) , Schnitzer Steel Industries, Inc. (SCHN - Free Report) and Nippon Steel & Sumitomo Metal Corporation (NSSMY - Free Report) . While POSCO and Schnitzer Steel Industries sport a Zacks Rank #1 (Strong Buy), Nippon Steel & Sumitomo Metal carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

POSCO’s earnings estimates for 2017 and 2018 were revised upward over the last 60 days. Its earnings are anticipated to grow 5% in the next three to five years.

Schnitzer Steel Industries’ earnings estimates for fiscal 2017 and fiscal 2018 improved over the last 60 days. Also, the company pulled off a positive earnings surprise of 16.13% in the last four quarters.
 
Nippon Steel & Sumitomo Metal’s earnings estimates for fiscal 2017 and fiscal 2018 improved over the past 60 days.

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