Numerous Brazilian industrial companies, not to mention the Bovespa
as a whole, have gotten hit hard since the start of 2014. The prior year
was a volatile one as investors became more concerned about slowing
growth in Brazil and difficult choices for the government regarding
inflation, fiscal stimulus, and infrastructure inadequacies. Weak
rainfall has exacerbated the problem, raising the prospect of
electricity rationing that could lead to a meaningful decline in
industrial output.
The Brazilian steel sector has gotten hit hard, with Gerdau (GGB), CSN (SID), and Usiminas (OTC:USNMY)
down 25% to 40% before a recent bounce. Electricity rationing would be
bad news for an already-stressed Brazilian economy, but there is more to
Gerdau than just one year of performance in Brazil. As non-residential
construction picks up in the U.S., Gerdau should see shipments,
utilization, and margins improve, and there is at least the possibility
that investors have overreacted to the potential downside in Brazil.
Assuming that Gerdau deserves a multiple in line with the global average
for steel, the shares look about 20% undervalued today.
Read more here:
Gerdau's Correction Seems Overdone
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