We issued an updated research report on Brazilian steelmaker, Gerdau S.A. GGB on Jan 15.&nbsp; Strengthening business opportunities from exposure in various end markets, growing steel demand and efforts to dispose non-core assets and lower debt burden will prove advantageous for the company. However, headwinds related to rising costs, raw material supply and industry competition might restrict its growth momentum in the near term. 
	 
	Gerdau currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $7.9 billion. 
	 
	Market sentiments have been positive for Gerdau, with its American Depository Receipts yielding 30.5% return in the last three months. This gain is above 23.2% rally of the <a href="https://www.zacks.com/stocks/industry-rank/industry/stel-producers-176">industry </a>it belongs to, in the same period. 
	 
	<img alt="" src="https://staticx-tuner.zacks.com/images/zadmin_tuner_image/ggb_2018_01_15.jpg" style="width: 620px; height: 273px;" /> 
	 
	Below we briefly discuss the company&#39;s potential growth drivers and possible headwinds. 
	 
	Factors Favoring Gerdau 
	 
	Domestic &amp; International Steel Demand: We believe that rise in demand for steel will create solid business opportunities for Gerdau. On the domestic front, any investment by the government in infrastructural development will work to the company&#39;s advantage. 
	 
	Per the World Steel Association report, the global steel consumption is predicted to grow 1.6% in 2018. Excluding the demand anticipated from China, steel consumption in the world is predicted to grow 3% in 2018. 
	 
	Business Diversification a Boon: Gerdau is well-poised to benefit from its diversified business structure that primarily includes crude steel (slabs, blooms, billets and flat steel) production and iron ore mining activities. Prime end markets served are construction, wind power, machinery and equipment, agricultural, highway, shipbuilding, and oil and gas. 
	 
	Furthermore, international diversity has played a major role in Gerdau&#39;s profitability over time. The company operates in South America, North America, Europe and Asia. Notably, it derived nearly 32.4% of third-quarter 2017 net revenues from its Brazilian operations while around 51.4% came from North and South American business operations. 
	 
	We believe that such business diversification helps the company lower its risks by allocating investments in various financial instruments, industries and other categories. 
	 
	Inorganic Initiatives Drive Growth: Over time, Gerdau has been restructuring its business portfolio inorganically, aiming to strengthen its core and profitable businesses as well as lowering debt burdens. In this regard, the company divested its business unit &mdash; Premier Thermal Solutions, L.L.C. &mdash; to Z Capital Partners, L.L.C. in the first half of 2017. It also signed an agreement to sell its 100% stake in the Chilean steel assets in October. 
	 
	The company has continued its efforts in 2018 as well. On Jan 2, it agreed to sell some of its U.S. rebar operations to Commercial Metals Company. This deal will enable the company to concentrate on its other important operations in North America and help in lowering its debt burden. 
	 
	Factors Working Against Gerdau 
	 
	Poor Valuation: On a P/E TTM basis, Gerdau seems overvalued compared with the industry with respective tallies of 27.4x and 10.7x. Also, the stock is trading above the average of last three months P/E multiples of 20.7x. This makes us cautious on the stock. 
	 
	Increasing Costs and Huge Debt Levels: Gerdau is suffering from the risks of escalated costs. In the third quarter of 2017, the company&#39;s cost of sales increased 11.1% year over year. Cost of sales, as a percentage of revenues, were 89.7% versus 88% in the year-ago quarter. Rise in costs of sales led to year-over-year decline of 170 basis points in gross margin. We believe, if unchecked, rising costs can continue to hurt the company&#39;s margins in the quarters ahead. 
	 
	Also, a high-debt level can lead to heightened financial obligations, posing serious threats to the company&#39;s financial health. Exiting the third quarter, Gerdau&#39;s long-term debt was approximately $14.1 billion. 
	 
	Threats From Raw Materials Supply Disruption &amp; Industry Competition: Major raw materials required for steel making are iron ore and coking coal. Disruption in the supply chain of these materials can jeopardize Gerdau&#39;s steel making operations. Also, raw material imports from intentional suppliers are subject to geopolitical risks and legal permits and duties. 
	 
	In addition, Gerdau faces active competition from other players in the industry. 
	 
	Stocks to Consider 
	 
	Some stocks in the same space worth considering are Nucor Corporation NUE, Schnitzer Steel Industries, Inc. SCHN and Steel Dynamics, Inc. STLD. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see <a href="https://www.zacks.com/stocks/buy-list/?ADID=zp_1link&amp;ICID=zpi_1link">the complete list of today&#39;s Zacks #1 Rank stocks here</a>. 
	 
	Earnings estimates of Nucor and Steel Dynamics improved for 2018 while that for fiscal 2018 increased for Schnitzer Steel, in the last 60 days. Also, financial performance of these stocks has been impressive in the last four quarters, with each pulling off a positive earnings surprise.

News

Trading Ideas

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Here's Why You Should Hold On To Gerdau Stock For Now