Brazilian steel giant Gerdau (NYSE:GGB) has seen its ADR share price double in the last month and a half, helped by better currency and the prospect that the political mess in Brazil may be heading toward a resolution that will allow those who remain in charge to start tackling the significant economic challenges facing the company. There has also been more optimism lately on steel, as the U.S. passed a highway bill and has been taking on low-priced imports through tariff actions, and as the Chinese may actually be serious about shutting down a meaningful amount of capacity.
I know readers don't want to see a cop-out like "valuing Gerdau is
really hard right now," but it is the truth. A significant chunk of the
negative movement in my fair value from last year can be tied to the
movement in currency that sapped the value of the company's
real-dominated cash flows and increased the debt burden, but there's no
certainty that reverses. Likewise, while Brazil has significantly
under-invested in infrastructure and has a low level of steel
consumption that suggests very large growth potential, there's no
guarantee that happens in what I'd consider to be a reasonable
investment time frame.
I do believe these shares are undervalued, but management has made
some questionable moves. That only adds to the already risky macro
picture. There could be money yet to be made here, but this is making
money the hard way.
Read more here:
Gerdau A Study In Risk Versus Opportunity