Gerdau's Long-Term Prospects Solid, Faces Near-Term Risks
Zacks Investment Research | Jun 20, 2017 08:29AM ET
We issued an updated research report on Brazilian steelmaker, Gerdau S.A. (NYSE:GGB) on Jun 19. The company’s long-term growth prospects are bright but exposure to headwinds might restrict its growth momentum in the near term.
In the last one year, the American Depository Receipts (ADR) of this Zacks Rank #3 (Hold) stock have yielded a return of 62.50%, outperforming the gain of 20.85% recorded by the Zacks categorized Steel Producers industry.
We believe that Gerdau’s product portfolio, international diversity and manufacturing techniques will help it grow over the long term. Also, any future investments by the government for infrastructure improvement will boost steel demand in these regions, thereby creating a lucrative market condition for the company. In addition, the world steel demand outlook published by the World Steel Association in Apr 2017 forecasted a strengthening steel demand recovery on the back of improving conditions in developed economies and growth in economies of emerging and developing nations. As revealed in the report, global steel demand is anticipated to grow 1.3% in 2017 and 0.9% in 2018.
Also, we believe that Gerdau’s strategy of disposing loss-making assets/low profit generating businesses will enable it to focus on the more profitable ones. For instance, the company completed the disposition of Spain-based special steel producer to Clerbil SL in 2016 while announced plans to divest its business unit, Premier Thermal Solutions, L.L.C, to Z Capital Partners, L.L.C. in Mar 2017. Moreover in March, the company formed a joint venture with Putney Capital Management to optimize its asset base and improve profitability.
Despite these positives, we believe that Gerdau is exposed to risks arising from higher raw material costs, foreign currency fluctuations and cyclical nature of the industry. Its last reported first-quarter 2017 results were weak. Bottom line in the quarter plunged to a loss of R$34.1 million ($10.9 million) from earnings of R$14.2 million ($3.6 million) in the year-ago quarter. Also, sales declined 16.1% due to forex woes and divestment issues.
Adding to the woes is Gerdau’s highly leverage balance sheet, with roughly R$15.4 billion of long-term debt at the end of first-quarter 2017. Net debt/EBITDA ratio in the quarter was 3.5x. We believe that such high debt levels, if left unchecked will increase the company’s financial obligations and impact its profitability.
Get The News You Want
In the last 60 days, the Zacks Consensus Estimate for the stock remained stable at 11 cents per ADR for 2017.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.