We recently upgraded Brazil-based Companhia Siderurgica Nacional (SID), or CSN to a Neutral recommendation from an Underperform rating assigned earlier.
Companhia Siderurgica primarily engages in the production of hot- and cold-rolled flat steel, galvanized sheets, and tin plates for the packaging, automotive, and construction industries.
We find the growth prospects of the company bright over the long term, considering the various projects that are being carried out by it and the escalating trends of the global steel demand. Reviving global economy, increasing private and public capital spending, and growth of the emerging economies are prime attributes supporting escalating steel demand. It is assumed that demand for steel would rise by 6% in 2011 and 2012, according to the World Steel Association.
In the second quarter of 2011, crude steel production was up 4% year-over- year and 10% sequentially while steel sales volume was up 7% sequentially, of which domestic sales accounted for 86.0%; overseas subsidiaries registered a 10% increase and direct exports around 4%. Sales volume, however, was flat on a year-over-year basis.
Further, the outlook for the Brazilian steel industry also looks favorable with the growth in manufacturing and construction industries. The forthcoming 2014 Soccer World Cup and 2016 Olympic games, to be held in Brazil, have also boosted the company's growth prospects considerably. Moreover, CSN's entrance into the cement business seems to be an added advantage.
Despite the positives, continuous rise in the cost of goods sold in the last two quarters raise our concerns for the financial health of the company. In the second quarter of 2011, cost of goods sold went up 25.8% year over year, leading to a 7% decline in gross margin.
In addition, CSN's escalating debt levels; ascribed primarily to funding the company's investment plans as well as high cyclicality and growing competition in the industry are major hindrances to growth. The company faces stiff competition from Ternium SA-ADR (TX) and Usiminas SA-ADR (USNZY), among others.
The current Zacks Consensus Estimate for the third quarter is 23 cents, representing a year-over-year decline of 17.86%. Estimates for the fiscal years 2011 and 2012 are $1.30 and $1.24, reflecting annual growth of 27.45% and a decline of 4.81%, respectively.
CIA SIDERUR-ADR (SID): Free Stock Analysis Report
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