Gerdau: Earnings Preview

Nov. 5.10 | About: Gerdau S.A. (GGB)

Gerdau S.A. (GGB) is slated to release its third quarter 2010 results on Friday, November 5. The current Zacks Consensus Estimate for the third quarter is 28 cents, representing an annualized growth of 21.74%.

Considering the earnings surprise, Lamar Advertising has outperformed the Zacks Consensus Estimate in all the preceding four quarters. The average surprise stands at 41.88%, reflecting the magnitude of out performance in the trailing four quarters.

Second Quarter Highlights
Gerdau’s second-quarter 2010 earnings surged to R$856.0 million (US$475.6 million) from R$467.0 million (US$223.4 million) in the second quarter of 2009. Earnings per share came in at R$0.52 (US$0.29 per ADR) versus R$0.27 (US$0.13 per ADR) in the comparable quarter a year-ago. Gerdau’s quarterly results also surpassed the Zacks Consensus Estimate of US$0.25 per ADR.

Net revenue soared 30.0% to R$8,296.0 million (US$4,608.9 million) from R$6,401.0 million (US$3,062.7 million) in the year ago quarter. The company’s results were well above the Zacks Consensus Estimate of US$4,592.0 million. The revenue growth was primarily driven by higher shipments in the quarter.

Crude steel production nearly doubled to 4,711 million tons, up 52% year over year, while rolled steel production jumped 40% to 3,910 million tons. Shipments were very strong in the quarter at 4,383 million tons and representing a 30% year-over-year growth.

Detailed discussion on the second quarter results can be found here: Gerdau Q2 Profit Soars

Agreement of Estimate Revisions
In the last 30 days, there were no estimate revisions in earnings estimates for the third quarter and fiscal year 2010 and 2011.

Magnitude of Estimate Revisions
Earnings estimate for Gerdau in the last 30 days were stable at 28 cents for the third quarter of 2010, $1.12 for the fiscal year 2010 and $1.55 for fiscal year 2011.

Estimates for 2010 represented a year-over-year growth of 55.79% while for 2011 a growth of 38.04%.

Our Take
We believe Gerdau S.A., one of the leading Brazilian steel makers, stands at an advantageous position to leverage from the growing world steel market. Global steel demand is likely to increase by 13.1% in 2010 and 5.3% in 2011, according to the World Steel Association. The Brazilian steel industry is also expected to get a boost as steel demand from the manufacturing and construction industries grows.

Moreover, Gerdau’s growing businesses and increasing self-sufficiency in raw materials (mineral resources) is an encouraging attribute. By the end of 2010, expectation is high for Gerdau’s annual iron ore production rate to reach 2.7 million metric tons, satisfying 50% of the company’s iron ore needs. By 2012, the company will be able to internally satisfy all its iron ore needs with an annual iron ore production capacity of 6.6 million metric tons.

However, growing competition in the Brazilian market might be a cause of concern affecting results in the quarters ahead. Gerdau faces stiff competition from its peers like Companhia Siderurgica Nacional (SID - Analyst Report) and privately-held ArcelorMittal Brasil S.A. Also, rising steel imports in the country may prove detrimental to the future prospects of Brazilian steel makers.

Further, the future of the world steel market depends substantially on the Chinese market, as the country’s requirement alone accounts for approximately 45% of the global demand. Despite the ongoing restructuring (restriction on power consumption and shut down of old plants) in the Chinese steel industry, it has raised hopes for other steel makers around the globe.

We currently maintain a Neutral recommendation on the company.