Gerdau's (GGB, Financial) headwinds seem far from over. The steelmaker continued to disappoint its investors after the company reported its fourth-quarter numbers that came below the consensus estimate. Led by these challenges, its stock has been falling for more than a year and is currently near its 52-week low. And now after declining more than 55% since January last year; the big question reeling in investors' minds is whether the stock has hit the bottom and could it be a turnaround from here on.
A look at the prospects
On the flip side, rising steel imports will keep pressing margins and consequently the financials of companies will be negatively affected. To add to this challenge, geopolitical conflicts in some regions are hampering their economic growth, which could further bring down its sales in the days ahead.
Its revenue for the quarter rose 5.1% from a year ago period to $4.26 billion while earnings dropped 20.1% to $154.7 million compared to last year. Its year-over-year decline in revenue growth was driven by weaker revenue growth along with higher operating expenses. But the management is taking various initiatives to improve its efficiency that would compliment with the present scenario in the steel industry. In this direction, the company sold its interest in Gallatin Steel that will help Gerdau to divest its resources from noncore assets.
While such efforts will improve its operational efficiency, the company continues to empower its fixed assets for long-term growth.
Going forward, there are mixed signals regarding the future prospects of global demand for steel. The management anticipates that the world steel industry will continue to face the headwinds of low consumption growth and installed over capacity. The economic downturn in Brazil coupled with its elevated tax burden, cumulative taxes, electric power cost and appreciated exchange rate will negatively impact the steel industry in the current fiscal.
Conclusion
In spite of this weakness in the global market, we could expect a significant improvement in Gerdau’s earnings as indicated by a forward P/E of 3.84 compared to a trailing P/E of 12.68. Moreover, the stock has been beaten down considerably in the past one year, which could give some upside momentum to its share in the coming months. Therefore considering the present industry scenario investors must be cautiously optimistic and should watch closely any economic boost coming from the global market as the company will digest this news and boost its stock price.
