Gerdau S.A. (GGB, Financial) operates through Brazil, North America, Latin America, Special Steel, and Iron Ore segments and specializes in the production of steel billets, blooms, slabs and semi finished products. The company uses mini mill concept of manufacturing in most of its mills, turning scrap into steel.
The company posted dismal first-quarter fiscal 2015 results and the stock is trading at around 52-week low, having lost over 22% year-to-date. Does this offer an opportunity to open a position, or does the stock still warrant a sell? Let’s take a look.
First-quarter numbers
Gerdau’s net sales declined 1% year-over-year to $3,652.9 million and the details of different segments are as noted in the table below
| Business Operations | % of Total Revenue | Growth % (Y-o-Y) |
| Brazil | 32.0% | -10.6% |
| North America | 33.2% | 12% |
| Latin America | 13.3% | 7.9% |
| Special Steel | 19.8% | -0.8% |
| Iron Ore | 1.7% | -60.4% |
Crude steel production declined 4.7% year-over-year to 4,341 million tons and shipments nosedived 5.6% year-over-year to 4,143 million tons. As a result of weak top-line performance and 1% year-over-year increase in cost of sales, gross margin contracted to 10.6% versus 12.5% in the year-ago period.
As a result of muted sales and contraction of margins, earnings declined a whopping 39.2% year-over-year and came in at $93.5 million. The steel producer exited the quarter with cash and cash equivalents of $1,106.5 million versus $1,138.1 million in the year-ago quarter. Also, long-term debt increased to $6,334.7 million from $6,398.7 million at the end of fiscal 2014.
Fixing the problem
There are a few initiatives which the company is banking on to boost revenue and increase earnings. For example:
- Growth via expanded geographical diversification is one of the corporate strategies at Gerdau. Bolstering the geographic expansion will enhance the tangible and intangible resource base, going forward.
- The company had positioned itself for growth through huge investments during the period from 2013 through 2017. With larger scale of operations, the steelmaker will improve top-line performance and at the same time lower its costs by taking advantage of greater economies of scale in manufacturing process.
- Investments in the new logistics program to cut down costs by improving operational performance.
Few Headwinds
- Appreciation of US Dollar with respect to Brazilian Real continues to adversely impact the company’s international revenues and profits.
- Economic slowdown in Brazil coupled with cheap imports from China is projected to see Brazilian steel consumption decline 7.8% in 2015, according to data from the Instituto Aço Brasil.
- Economic slowdown in Russia, China and Brazil has resulted in global growth of steel products to increase by a meager 0.5% year-over-year in 2015.
Wrapping up
The short interests in the stock is surging and this means that the stock price will be pressured going forward. This has increased from 18.73 million shares in March to 20.65 million shares in April. Around 3.80% of company’s shares, which are float, are short sold. The stock is trading a shade below 50-day 200-day simple moving average.
However, given the fact that it is near its 52-week low and the company is making moves to fight back, Gerdau can reverse the trend. At a P/S of 0.34 and forward P/E of 3.18, the stock looks cheap from valuations point of view. For the next five years, analysts expect compound annual growth of 17.40% versus 14.32% decline for the preceding five years.
Hence, those who have appetite for risk, this stock can offer good returns in the long run.
