Brazilian iron ore miner Gerdau (GGB, Financial) is worried about the challenging landscape in the steel industry. The company is struggling and is trading at its 52-week low on the stock market. However, management is now making moves to lower its higher cost of sales, financial expenses and foreign currency translation losses. Let us take a look at Gerdau's prospects.
Recent results and beyond
In the recently reported quarter, Gerdau’s revenue declined further by 10.3% on the year-over-year basis. On the earnings front as well, Gerdau couldn’t prove its determination. Its EBITDA margin sank to just 4.8% in this third quarter as compared to 39% from last year. The stock is presently trading $3.56 which is a 52-week low for the company.
Gerdau is on a tough ride. The declining financial performance is making its income even a harder thing to achieve. The company is continually performing weak due to challenging landscape of the steel industry. The growing competition, margin pressure and rate of volatility is making things for Gerdau even tougher. Moreover, the company is still facing overcapacity of steel production also, it is also facing lower pace of growth of steel consumption. However, the management of the company is well aware of this weakness and it is now focusing on various other aspects to improve its profitability.
Smart moves
Under some of the undertaken strategies, Gerdau has recently signed an agreement with Nucor Corporation to sell its 50% interest in Gallatin Steel Company. This is expected to benefit Gerdau. It doesn’t matter to the company much as it was a non-core asset for it and with the sale of this, Gerdau will have more of the free standing resources that can utilized in stretching the footprints of its core operations across the space.
Not only in the domestic market but Gerdau is seeing some positive signs in its international markets as well that can improve its performance in the future. The company is pleased with the significant growth that it is seeing in the North American market. It is also seeing the demands growing in Europe and India which might be turn out to be key growth drivers for Gerdau in future. While in Brazil it is seeing reduction in production and shipments due to weak automotive segment.
This is affecting the entire chain. The company is expecting North America to be a good market for it. With the startup of new continuous casting operation at the St. Paul Mill is increasing the installed capacity of the plant. This will enhance the production and as the market turns back and demands rise, Gerdau will be in a good position to supply the growing demands.
The company also has investment plans. The company is expecting these investments to help it to expand and improve the quality of its products and productivity of its units. Moreover, Gerdau is also focusing on production of ores for its own consumption. This will also increase the competitiveness of its Ouro Branco Mill located in Minas Gerais.
Still above all, Gerdau is expecting challenging outlook in Brazil due to soft economy, while in the Europe the company is expecting some good yield from it as its economy is expected to advance well in its recovery process. In addition, Gerdau is planning to focus majorly on adjusting its operations which are still under pressure. It is engaged in reducing operating costs to improve its margins in the upcoming quarters.
Conclusion
Moving on to the fundamentals, with a trailing P/E of 10.49 the stock looks cheap but the forward P/E of 4.44 shows slow earnings growth due to soft steel industry. But in the next five years, the company’s earnings are growing at a CAGR of 10.50% which is more than the industry average of 3.69%. All these facts shows that Gerdau is not doubt working hard to be on track despite weaknesses. Its efforts are good but might take more time to be profitable. Thus, I would like to suggest the short term investors to stay away from Gerdau until it shows concrete signs of gaining market share.
