Friday, December 29, 2017

Gerdau On A Better Path, But Higher Utilization Is Essential

With Brazil looking healthier and the U.S. government taking a stronger position with respect to protecting domestic steel production from imports, Gerdau’s (GGB) outlook has improved in many respects. Even so, the share price performance since my last update in late 2016 hasn’t been all that special – the 30% move isn’t bad, but you’d have done only slightly worse with the S&P 500 (without the attendant risk and volatility), and other steel companies like Steel Dynamics (STLD), Nucor (NUE), and Ternium (TX) would have delivered even better returns.

I expect that Brazil will continue to recover, and I’m cautiously optimistic that the U.S. market will support better margins for Gerdau’s long steel products. I continue to believe that Gerdau can generate long-term FCF growth in the mid-single digits, with double-digit growth in both FCF and EBITDA from 2018 out through 2021. The valuation picture is mixed; the shares are no longer a bargain on a DCF basis (not surprising for a cyclical company in a recovery cycle), but EV/EBITDA suggests some potential upside is still in play.

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Gerdau On A Better Path, But Higher Utilization Is Essential

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