We recently maintained our Neutral recommendation on
), one of the leading Brazilian companies producing steel.
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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
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
Kobe Steel Ltd.
), each come with Zacks Rank #2 (Buy).