Friday, April 8, 2016

Seeking Alpha: Gerdau A Study In Risk Versus Opportunity

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

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