We recently maintained our Neutral recommendation on Gerdau S.A. (GGB), anticipating the company to perform in line with the broader market.
Why Neutral?
Over the long-term, Gerdau seems well positioned to leverage benefits from the rising wave of infrastructural requirements in the domestic and international markets. The World Steel Association predicts global steel consumption to grow 3.1% in 2013 and 3.3% in 2014. Instabilities in the U.S. and the Eurozone are abating while China has recently shown solid signs of growth, favoring overall growth prospects of steel makers.
The domestic market for Gerdau will receive a boost as Brazil prepares to host major sporting events in the coming years and make major investments in infrastructure. These include development of ports, railroads, airports, wind farms and roads, among others.
To meet the rising demand from the emerging economies of India and Japan as well as that of the United States, Gerdau plans to invest roughly R$8.5 billion from 2013 through to 2017. Efforts are being made to increase production of iron ore and flat steel in Brazil, special bar quality in both Brazil and the United States and special steel in India.
Despite bright long-term growth prospects, concerns surrounding Gerdau in the near-term have forced us to remain on the sidelines regarding the company. 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 $13.5 billion. Other stocks to watch out for in the industry include Companhia Siderurgica Nacional (SID), with a Zacks Rank #1 (Strong Buy). Of two others, United States Steel Corp. (X) and General Steel Holdings, Inc. (GSI) carry Zacks Rank #2 (Buy).
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