Considering the severely precarious situation Companhia Siderurgica Nacional (SID) faces, we currently downgrade our rating from Neutral to Underperform. The downgrade reflects our concern about escalation in cost of goods coupled with intermittent demands of steel from the world market.
Since the third quarter of 2011, the company has been experiencing pressurized gross margins stemming from surging cost of goods sold, a phenomenon SID faced in its December quarter. SID’s cost of goods sold increased almost 32% annually which in turn dipped the gross margin by 400 basis points. It is imperative that management steers focus towards curtailing its investment plans in order to keep a check on its ever-increasing debt levels.
The Brazilian economy is heavily dependent on trades with the U.S.; there is thus a lurking fear of exchange rate fluctuations throughout the industries in Brazil which can incipiently deteriorate big companies such SID’s individual performances.
One of the biggest concerns about SID’s stock is the volatile nature of the industry it pertains to; rather easily affected by fiscal downturns and change in trends of other industries such as automotive, construction, distribution etc. Hence, SID remains vulnerable to threats arising from these scenarios.
Also, SID has a few highly ominous competitors in the steel industry of a fairly proactive stance. These include Russel Metals, Inc., L. B. Foster Co. (FSTR) and Grupo Simec S.A.B. de C.V. (SIM). It would be wise to remain wary of progressive moves by such players as the cross elasticity can adversely affect CSN’s individual performance.
However, there are a few aspects which are likely to ameliorate growth for the company in the upcoming quarters. SID has been making incipient advances to expand its core business segments, primarily by investing in various iron ore mining, cement and infrastructure projects. Its entire mining segment is expected to have a production capacity of nearly 79 million tons of iron ore per year by 2014.
In order to strengthen its mining sector, SID plans to invest about $393 million at its Casa de Pedra and $135 million at its Namisa mine in 2012. Even though margins are performing quite detrimentally, it is important that the company cautiously makes these advances in order to increase sales volumes and expand market share in the economy.
There has been a growth trend in Steel demand in the world currently. SID appears to be in a favorable position in this regard as steel demand is expected to catch pace as Brazil plays host to the 2014 Soccer World Cup and 2016 Olympic games.
SID recently acquired Stahlwerk Thuringen GmbH (SWT) from the Alfonso Gallardo Group for about $644 million which currently has a steel production capacity of 1.1 million tons. Management’s intent to accrue gains from making such strategic and profitable acquisitions might prove to be an important growth driver in the coming years.
Even though a few upsides prevail, we consider it wise to maintain a sideline stance for now owing to the tremendously precarious conditions clouding the company’s growth lines for the coming time. However, the company currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
FOSTER LB CO (FSTR): Free Stock Analysis Report
CIA SIDERUR-ADR (SID): Free Stock Analysis Report
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