Gerdau Worth Another Look As Healthy Demand Leads To A More Gradual Down-Cycle

 

Writing about Gerdau (GGB) in early September of 2021, I thought that while the shares of this Brazilian steel company weren’t expensive, there was sentiment risk from a market that had started moving away from steel stocks. That call worked pretty well up until fourth quarter earnings, with the shares lagging the S&P 500, but the earnings report and guidance call lit a fire under the shares, sending them 20% higher since.

I do think we’re “post-peak” for the sector, and I expect sales and EBITDA to decline in both 2022 and 2023, with 2023 FCF about 25% below 2021 levels, but I think the industry is likely to see a firmer bottom than in past cycles, and I like Gerdau’s leverage to a healthy Brazilian market, as well as its leverage to stronger U.S. construction and infrastructure spending. On top of that, I think this is a well-run company, with management taking a very prudent approach to both debt and capex. While steel companies are rarely appropriate as long-term holdings, I do think Gerdau’s ADRs should trade well into the $6’s, offering decent upside at today’s price.

 

Read the full article here: 

Gerdau Worth Another Look As Healthy Demand Leads To A More Gradual Down-Cycle

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.

 

Click here to continue: 

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

Gerdau Making The Most Of A Recovery Boom In Brazilian Steel

Never let a booming market go to waste. Brazil’s steel market has been strong and Gerdau (GGB) is taking advantage, leveraging both its strong share/capacity in Brazil and past cost initiatives to post record profits during this upturn. While recent profitability hasn’t been as strong in the U.S. business, the surge in prices here too should drive better results for at least the first half of 2021.

For all of the strength in Gerdau’s business, the stock hasn’t been the leader you might assume – as I’ve often said in reference to steel stocks, one of the paradoxes of this sector is that inferior operators tend to outperform in upcycles, and so it has been here. While Gerdau’s 50% move (closer to 40% for the ADRs) since my last article is good, Arcelor Mittal (MT) and Usiminas (OTC:USNMY) have roughly doubled the returns of Gerdau.

I like the recovery story in Brazil, but I’d be careful about pushing my luck here, as the shares are already trading at a pretty fair valuation unless you expect materially better performance (beat-and-raise) over the next few quarters – a definite possibility, but clearly not a certainty. I can see some trading/speculative appeal here, but I’d at least consider some stops as a defensive measure.

 

Read more here: 

Gerdau Making The Most Of A Recovery Boom In Brazilian Steel

Gerdau Flattened As Covid-19 Pushes Brazil's Long Steel Recovery Out At Least A Year

This had been shaping up as a good year for Gerdau (GGB), with good underlying evidence of growing steel demand on improving vehicle production in Brazil, increasing non-residential construction investment, and recovering industrial and consumer markets. Then Covid-19 swept the globe, and now Brazil’s looking at a year of GDP contraction, and probably not much GDP growth until late 2021 or 2022. On top of that, the U.S. non-residential market doesn’t look all that healthy to me over the next few years.

I do believe Gerdau is one of the better emerging market steel companies, but the headwinds in Brazil, the U.S., and the rest of LatAm are real. That makes Gerdau a riskier call in the short term, but I also do think the current share price underestimates the company’s long-term potential.

Read the full article:
Gerdau Flattened As Covid-19 Pushes Brazil's Long Steel Recovery Out At Least A Year

Growing Signs Of A Brazilian Recovery Have Fueled A Nice Rally In Gerdau Shares

I liked Gerdau (NYSE:GGB) for its leverage to a Brazil recovery story back in October, and the relatively short time since, that story has really caught on with investors. Between the prospect of significant improvement in Brazil in 2020 and more or less stable (but still quite profitable) conditions in North America, Gerdau is looking at solid bounce in 2020 that should make it one of the better growth stories in steel next year.

With the shares running up a third since my last article, I really can't say these shares are undervalued, though the relative value proposition is still fairly attractive next to the likes of Nucor (NUE) and Steel Dynamics (STLD) and considering the more promising near-term outlook relative to Ternium (TX). I usually like to buy commodity stories with a wider margin of error in the valuation, but as a momentum/trading idea, I can't really say Gerdau is a bad one.

Read the full article here:
Growing Signs Of A Brazilian Recovery Have Fueled A Nice Rally In Gerdau Shares

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.

Read more here:
Gerdau Doing What It Can, But End-Market Demand Remains Soft

Gerdau's Share Price Weakness May Not Be Entirely Reasonable

I was skittish about the near-term performance prospects for Gerdau (GGB) back in early December, and the shares have fallen about 10% since then – modestly underperforming a weak steel sector over that time. Gerdau’s share price performance hasn’t been helped by weaker steel prices in the U.S., nor a slower-to-develop recovery in Brazil, and costs continue to rise in the meantime.

I’m not all that bullish on the U.S. steel sector, but I think Gerdau has significantly upgraded their U.S. operations, and I’m more bullish on the prospects for Brazil’s steel sector over the next few years as the country makes a tentative economic recovery. Like Ternium (TX), I think Gerdau could be positioned to post EBITDA and FCF growth at a time when U.S. steelmakers will have more lackluster results, and a stronger recovery in Brazil could maintain investor enthusiasm for that region. I’m less bullish on Gerdau relative to the sell-side, but below $4/share, I think these shares are worth a look.

Read the full article here:
Gerdau's Share Price Weakness May Not Be Entirely Reasonable

Gerdau Looking Toward Better Results

Brazil’s Gerdau (GGB) offers a curious investment proposition today. Although the shares have lagged Ternium (TX) over the past three months, Gerdau has been the best-performing steel stock of the group I follow closely, and by a fairly wide margin (outperforming #2 Ternium by close to 15%). Gerdau is also one of the few steel companies/stocks where there is basically a unanimous expectation of EBITDA heading higher for the next two to three years, largely on the back of an expected recovery in Brazil.

Metal spreads may well have peaked in the U.S. (where Gerdau generates close to a third of its EBITDA), but volume demand growth is expected to continue and Gerdau has under-utilized capacity it can bring into action. What’s more, spreads in Brazil could still improve and Gerdau is still reaping the cost savings benefits of digital investments. Gerdau’s valuation doesn’t scream “bargain”, but in the real world of stock performance, this is still a name to consider given its potential for further upward earnings revisions and its capacity to grow at a time when many peers will see earnings contraction.

Read more here:
Gerdau Looking Toward Better Results

Ternium's Investor Day Seems To Have Restored Some Confidence

Ternium (TX) shares have had a poor year, underperforming the ADRs of ArcelorMittal (MT) and Gerdau (GGB), as well as the shares of other steel companies like Steel Dynamics (STLD). Although Ternium is looking at an attractive long-term opportunity to grow its share of the Mexican market, investors have been scared off by a host of uncertainties, including the NAFTA renegotiations, the Mexican election cycle, the deterioration of the Argentine economy, uncertainty in Brazil, weakness in Colombia, and the prospect of peaking global steel prices.

Management’s investor day earlier this month did seem to restore some confidence to investors, but the shares continue to look surprisingly cheap on a relative basis, particularly when factoring in the company’s strong margins. Although I remain concerned we’re past the peak in steel and that it will tough for any steel stock to significantly outperform, Ternium’s share price and valuation just look too low to me.

Click here for more:
Ternium's Investor Day Seems To Have Restored Some Confidence

Can A Better Second Half Drive Some Enthusiasm For ArcelorMittal?

My concerns back in the late spring about it being too late in the cycle to make good returns in steel sector appear to have played out this summer. ArcelorMittal (MT) has declined more than 10% since my last update on the company, despite a stronger-than-expected second quarter and a stronger outlook for the second half. What's more, steel prices have held up, as has demand, and spreads are still attractive. It's not just ArcelorMittal, though, as Voestalpine (OTCPK:VLPNY), U.S. Steel (X), Ternium (TX), Steel Dynamics (STLD), and Nucor (NUE) are down over that period as well, and Acerinox (OTCPK:ANIOY) is barely up.

ArcelorMittal looks very cheap on the basis of near-term EBITDA, and even looking a few years ahead to declining prices and profits suggests that today's valuation is weak relative to historical norms. At this point, I'm not really sure what's going to bring investors back to this name, as steel prices aren't likely to improve much (if at all) from here, and investors tend to bail when pricing momentum fades. So, while I do think ArcelorMittal looks unfairly cheap, the markets don't care about fair, and investors considering these shares need to be aware of the risk that this is a value trap.

Continue here:
Can A Better Second Half Drive Some Enthusiasm For ArcelorMittal?

Gerdau Facing A Still-Challenging Brazil, But U.S. Margins Improving

These are still challenging days to be a steel producer in Brazil. Pushing through price increases takes some effort and patience, and demand is still being hamstrung by soft infrastructure spending and tenuous consumer confidence. Even so, Gerdau (GGB) is back to nearly 20% EBITDA margins in its home country, while efforts to improve margins in the U.S. also seem to be producing some benefits.

Gerdau shares have fallen about 16% since I last wrote on the company (when I thought they looked a little pricey), with a weaker Brazilian real exacerbating a 6% decline in the local shares. I can't say that the shares are supremely undervalued today, and I think I'd rather take my chances with Ternium (TX) in Latin American steel, but the shares do appear to have upside from here and that upside could expand if and when confidence returns to Brazil and as the company makes more progress with U.S. margins.

Follow this link to continue:
Gerdau Facing A Still-Challenging Brazil, But U.S. Margins Improving

Ternium Continues To Surpass Expectations And Still Seems Too Cheap

Ternium (TX) confounds me at times. This Mexico-focused steelmaker has an above-average track record when it comes to margins and returns on capital, operates in a pretty stable region, has access to multiple growth markets, and has been investing in growth projects at what appear to be good future IRRs. And yet, Ternium trades at one of the lowest forward multiples in the group even after a good run in the share price.

As Ternium continues to beat and raise, my expectations go up as well. I do see some risk that EBITDA could reach a near-term peak in 2019 or 2020, but the company’s leverage to recoveries in Argentina and Brazil makes that a tough call, and there are still significant opportunities to gain share in its home market. Even at 4x my new 2018 EBITDA estimate, it looks like there’s double-digit upside left in these shares.

Read the full article here:
Ternium Continues To Surpass Expectations And Still Seems Too Cheap

Expectations Seem To Have Caught Up To Gerdau

Brazil's Gerdau (GGB) has remained one of the strongest performers in the steel sector, as the company is benefiting from a healthy combination of end-market recoveries in Brazil and North America and better management discipline. Gerdau's management team still believes that they can drive North American margins into the double digits and that the recoveries in Brazil's construction and infrastructure sectors are only getting started.

All of that sounds great, but price/value remains a hang up for me. Unlike many North American and European producers, I don't think Gerdau is going to see a near-term EBITDA peak in 2018 or 2019. I'm willing to give Gerdau a higher EBITDA multiple than I would for most steel companies, but it takes a 12-month EBITDA estimate of over R$6B and a multiple of over 7x to drive a compelling fair value from here.

Continue here:
Expectations Seem To Have Caught Up To Gerdau

Long Products Should Drive A Good 2018 For Nucor

These are good days to be a steel company. Even with the negative impact of higher scrap costs and import competition, revenue and margins are better than they’ve been in some time. For Nucor (NUE), it’s not just about riding the cycle (although the cycle is important), as the company has been continually invested in value-added capacity and executing tuck-in acquisitions to broaden its portfolio. With relatively healthy industrial markets and the prospect of protection from imports, 2018 is looking pretty good for Nucor and peers/rivals like Steel Dynamics (STLD), Gerdau (GGB), and Commercial Metals (CMC).

Price/valuation is a hang-up for me. While an 8x multiple on my 2018 EBITDA estimate would offer some upside (about 5%), that’s about as high as I’d go for the company. There are certainly opportunities for Nucor to outperform in 2018 and drive a higher fair value by virtue of a higher EBITDA estimate, but this isn’t my favorite steel name right now and that’s not surprising as up-cycles tend to favor lesser operators and Nucor remains among the best-run companies in the industry.

Read more here:
Long Products Should Drive A Good 2018 For Nucor

Volume Remains The Critical Driver For Insteel

Insteel (IIIN), the country's largest independent manufacturer of steel reinforcing products, is a challenging company to evaluate as an investment. On one hand, I believe this company is run along very sound lines, with management looking to drive higher value-added sales and consolidate the industry, while also distributing cash to shareholders through dividends, special dividends, and buybacks. On the other hand, this company is basically a "commodity-plus" type of business, where demand is largely outside of management's influence, where pricing spreads have significant influence, and where capacity utilization is critical to margins.

I wasn't thrilled with the valuation when I last wrote about Insteel (in September of 2016), and the stock chopped lower until starting to rebound this fall. At this point, I am cautiously optimistic/bullish on the company's prospects. Demand should improve to a level that can drive attractive capacity utilization and pricing should continue to help spreads - both of which are good for margins. Valuation remains tricky, though, as I think the company needs to get over a $110M/quarter run-rate in sales to really offer attractive upside.

Read more here: Volume Remains The Critical Driver For Insteel

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.

Follow the link for more:
Gerdau On A Better Path, But Higher Utilization Is Essential

Both Brazil, And Steel, Appear To Be Improving For Gerdau

Picking winning Brazilian stocks hasn't been too hard this year, what with the iShares Brazil Index (NYSEARCA:EWZ) up about 80% year to date as the country's currency has strengthened and sentiment has improved that the economic situation has bottomed out. For steel company Gerdau (NYSE:GGB), things have been even better since my last update, as the ADRs have risen almost 75% since that April piece (with the local shares up about 55%), beating Mexico's Ternium (NYSE:TX) (up about 25%) and fellow Brazilian CSN (NYSE:SID) (up about 55%).

I see a more balanced risk-reward trade-off today. On the positive side, I do believe Brazil will recover from here and stronger demand in sectors like autos, appliances, and construction should be good for domestic steel demand, not to mention the prospects for long-term infrastructure investment. On the negative side, Gerdau is enmeshed in litigation tied to corruption and taxes, the Brazilian recovery could be prolonged, and management hasn't always been a good steward of shareholder capital.

Read more here:
Both Brazil, And Steel, Appear To Be Improving For Gerdau

Insteel Hoping That Higher Construction Spending And Better Spreads Lead To A Long Summer

Insteel (NASDAQ:IIIN) is basically a "commodity-plus" type of business (meaning that there is some value-add and maybe a small moat), but management has done a very good job of running the business through the good times and bad. Although revenue isn't that much higher than when I last wrote about the company (as pricing pressure has mitigated shipment growth), the company has done a good job of leveraging capacity utilization and improving spreads to drive materially higher margins and cash flow.

The "but" is how long this can last. Non-residential construction spending has risen almost 40% from its January 2011 low, but the FAST Act should start supporting more highway spending as this year draws to a close. I like the prospects for Insteel to log multiple years of double-digit FCF margins as it further leverages its available capacity (perhaps even topping $100 million in FCF), but it's hard to see how things are truly different this time. This is a good management team, and I give them the benefit of the doubt that they will maximize the opportunity in front of them, but I think the risk/reward is no longer in investors' favor given the valuation.

Read more here:
Insteel Hoping That Higher Construction Spending And Better Spreads Lead To A Long Summer

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

Seeking Alpha: Brazil's Ailing Economy Keeps Gerdau Under The Weather

As I recently discussed in an article on Mexico-centric steel company Ternium (NYSE:TX), I've been on the wrong side of the tape by liking Latin American steel companies and it has been even worse for the Brazilian companies. Growing Chinese exports have continued to weigh on global steel prices, but Brazil's economy hasn't improved since the election and weak civil construction and heavy manufacturing further undermined Gerdau's (NYSE:GGB) operations.

Like Ternium, I think there is long-term value in Gerdau. The company has a diversified production base (blast furnaces and mini-mills) and has been making investments to improve its vertical integration and skew towards more value-added products. Unlike Ternium, though, I see more challenges in Gerdau's biggest market and more operational risk. I do think Gerdau can trade higher over the long term, but it is harder for me to make a case that this is a must-buy today.

Follow the link to the full article:
Brazil's Ailing Economy Keeps Gerdau Under The Weather