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Iron-Clad Brazilian Company, Gerdau S.A. Grows Earnings 153%

January 17, 2009 | About:
A small nail factory in Porto Alegre, Brazil, was started more than a century ago. In 1901, Joao Gerdau, along with his son, Hugo, opened Pontas de Paris.

A scant fifty years later, the company moved into the steel-making business and became known as Gerdau S.A. In the next fifty years, Gerdau would become the world’s 13th largest steelmaker with 317 facilities grinding out 25.9 million metric tons of steel a year.

Its product serves the civil construction, industrial and agricultural sectors in 14 different countries.

The company just released its third quarter earnings, and they are good. Damn good…

A Very Good Year

For the first nine months of 2008, Gerdau S.A. (GGB) saw its profits increase by 38% to $2.19 billion. Revenues jumped 44.1%, with an even higher percentage for its Brazilian operations. Sales also increased by 21.7%… and it’s investing in more production.

News on September 11 reported that the company was investing $524 million in a new steel-making plant in Argentina. That will create 3,200 new jobs and increase the company’s total production by 1.1 million tons a year.

So explain to me why the stock is down 60% over the last year? On November 8, 2007, Gerdau traded at $13.72. A year later, it traded at $6.31. But why? I can’t seem to find a good reason.

For three straight quarters, Gerdau has increased both revenue and EBITA by at least 20%… Just look at these numbers:

QuarterRevenuesEBITA
Q1 200821.9%30.4%
Q2 200847.2%72.0%
Q3 200862.4%153.7%


The company’s CEO, Andre Gerdau Johannpeter, said in the earnings report, “We have the flexibility and all necessary conditions to adjust to adversities in the current world economy.”

In fact, Brazil, the company’s main breadwinner, is expected to grow despite the global crisis. So while steel demand may be slowing somewhat, the company is forecast to have a good year.

Product Demand Only Part of It

And just so you know it’s not just steel demand that’s kept this company’s profits coming… Let’s compare Gerdau to another steel company with operations in places like Argentina and Mexico: Ternium (TX:NYSE), who just reported a 15% rise in net income (year on year).

Here’s the thing: That 15% rise is overshadowed by the fact that its net income of $247 million is only half that from the previous quarter. The main reason for this drop? Lower net foreign exchange results.

This weird fluctuation is seen in the company’s EBITA. This figure grew 101% year over year in the third quarter, but is down 11% from the second quarter.

And in the fourth quarter, the company forecasted further contraction in income, which doesn’t bode well.

You see, most international exporting companies have to hedge themselves against their own currencies. But with the global mayhem shoving some denominations higher and kneecapping others, it’s obvious that some companies are going to be left holding the short end of the stick.

High Expectations

Argentina’s in that bracket. Chile, on the other hand, seems much more stable at this point. As evidence, its state-owned copper company, Codelco, just reported that its Gaby mine is now at full production and will start to expand its capacity from 150,000 tons a year to 170,000 tons over the next two years.

Does Chile have problems? Yeah, sure… Its consumer price index jumped sharply in October, and the government expects to use $1.5 billion to help combat the global financial crisis.

But Chile is also enjoying lower oil prices and a relatively cheap currency, which is good for export companies.

On the whole, I expect Chilean companies to outperform Argentine companies. But I expect Gerdau to outperform both countries.

The company released a statement on September 29, 2008, saying, “GERDAU informs its shareholders and the general market that it has not contracted foreign exchange derivatives or speculative financial investments that involve risk and/or leveraging nor adopted the use of these derivative financial instruments as part of its practice.”

That seems a heck of a lot safer than what we’ve read about Ternium.

Strong Performance and Expansion

I also think continued growth will be due in part to Brazil’s growth story, but more so from expanding operations. The company is spread out in 13 other countries, some of which are on the verge of some really stellar GDP growth, should the world ever get back on her feet.

Peru and Colombia spring to mind first…

So you have strong performances in larger countries, like Brazil, and you have expansion in growing countries, like the $1.4 billion investment into Siderperu to increase capacity more than 600%.

With a price tag well below $10, this stock is quite nearly a “steal.” This stock has a market cap of around $9 billion, but an enterprise value of $14 billion. Add to that a nice quarterly dividend ($0.18 for the third quarter of 2008), and you’re well on your way.

Consider Gerdau S.A. (GGB) for your portfolio so you can profit off today’s global explosion.

Sara Nunnally, Senior Research Director,

Taipan Publishing Group

About the author:

Taipan Publishing Group
Taipan Publishing Group: Taipan Publishing Group offers investors a diverse selection of financial research services to help boost short- and long-term gains from today's global market boom. Our international team of financial investment experts expose top stock, emerging and frontier market opportunities before other investors can capitalize. Visit: www.taipanpublishinggroup.com

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Rating: 4.0/5 (3 votes)

Comments

Callaquin
Callaquin - 5 years ago
part of it its that they cut their dividend I think. Ticker "SID" has the competitive advantage in Brazil rather than gerdau. SID should trade at a premium compared to gerdau.

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