Gerdau Set For Record Cash Flows, But Investors Seem To Have Moved On

 

I’ve said before that timing the peak of commodity cycles is a difficult task and few analysts or investors get it right two cycles in a row. I’ve likewise said that it’s painful to hold commodity stocks once the market has moved to a post-peak mentality.

Both of those phenomena have been on display over the last six months at Gerdau (GGB), as this well-run Brazilian steel producer saw its ADRs shoot over $7/share, before retreating back and ending about 18% higher (total return) than where they were at my last update. That performance is better than what Usiminas (OTCPK:USNZY) or Companhia Siderúrgica Nacional (SID) managed over that time, but not as good as the performances from ArcelorMittal (MT), Nucor (NUE), or Ternium (TX).

The near-term outlook for Gerdau is still pretty positive, with strong improvement underway in Brazil’s construction market, as well as improvements in the industrial markets and markets in South America. The new U.S. infrastructure bill should add to steel demand for several years, but China’s environment-driven curtailments are still a key unknown. My bigger concern, though, is that the market has simply moved on for this cycle. Gerdau offers some decent long-term upside at this price, but corrections on cycle downturns can still be pretty brutal.

 

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Gerdau Set For Record Cash Flows, But Investors Seem To Have Moved On