Gerdau Doing What It Can, But End-Market Demand Remains Soft

An ever-present challenge for commodity company management teams is that there’s only just so much they can control – ultimately end-market demand and pricing, not to mention substantial percentages of their input cost, are beyond the influence. I believe that’s relevant in the case of Brazil’s Gerdau (GGB); management has done its part to run this business about as well as could be expected, but weaker demand in key markets like Brazil and the U.S. are sapping the company’s near-term earnings power.

Management’s expectation for a better second half in 2019 now seems out of reach, but the market also appears to have adjusted since the second quarter earnings report. While Gerdau has outperformed other international steel companies like ArcelorMittal (MT) and Ternium (TX) on a year-to-date basis (“outperformed”, in this case, means “declined less”), the performance has been more ordinary since then.

The valuation and investment opportunity with Gerdau is mixed. I see more upside in Ternium, but I also think Gerdau is likely to have a better 2020 than most other steel companies on an improving Brazilian economy.

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Gerdau Doing What It Can, But End-Market Demand Remains Soft