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SID Remains Rated Neutral

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We reiterated our Neutral recommendation on Brazilian steel maker, Companhia Siderurgica Nacional (SID - Free Report) , or CSN, in anticipation of the company’s performance in line with the market in the quarters ahead.

The $7.96 billion company is among the best steelmakers in Brazil and is well positioned to leverage benefits from the growing steel market in the country as well as worldwide. According to the World Economic Outlook’s (WEO) projection, published by the International Monetary Fund (IMF) in October 2012, the global economy  would grow 3.3% in 2012 and 3.6% in 2013.

Recovery in global economy has boosted demand for better infrastructure and agricultural needs, in turn; it has also increased demand for steel. According to the World Steel Association, the apparent global steel consumption is expected to increase by 2.1% in 2012 and 3.2% in 2013. These forecasts include the impact from the prevailing weakness in Europe, slow growth in China and the United States.

Talking of Brazil, growth prospects of the steel industry is bright as the country is gearing up to host two major sporting events; the 2014 Soccer World Cup and 2016 Olympic Games. Moreover, rising demand from the manufacturing and construction industries and infrastructure investments induced by a rise in government spending are added benefits for the industry.

Despite these positives, near-term concerns and financial performances keep us on the sidelines. Third quarter 2012 results, though show a marked improvement sequentially, failed to gain enough momentum on a year-over-year basis. Net earnings fell roughly 85% in the quarter while earnings per ADR come in at US$0.06—above the Zacks Consensus Estimate of US$0.01. Roughly a 23% increase in the cost of sales offset a mere 0.6% rise in revenue that led to a fall in gross margin by 14%.

Considering all these, we prefer remaining on the sidelines for the stock. It currently carries a Zacks #3 Rank, implying a short-term Hold rating. The company competes with Ternium SA-ADR (TX - Free Report) and Mechel Oao ADS among others, both with a Zacks #3 Rank (Hold).

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