Gerdau AmeriSteel Building its Way to the Top

Jan.29.07 | About: Gerdau Ameristeel (GNA)

The Tampa, Florida based Gerdau AmeriSteel Corp. (GNA) is a minimill steel manufacturer and producer in the U.S. and Canada. It is also the second largest company of its kind in North America. The company originally spun-off on October 14, 2004 from Gerdau S.A. (NYSE:GGB), a Brazilian producer of crude steel and similar products.

Incorporated in 1970, the company operates through two main businesses; Minimills and Downstream Operations. Through these businesses GNA operates 17 electric steel mills, 17 scrap recycling facilities and 46 downstream operations. Its main product, reinforcing steel, is used by a broad range of clientèle that includes industrial builders, building contractors and commercial clients. With operations and facilities in Louisiana, South Carolina, Arkansas, Ohio and Minnesota, the company had established a foundation in the industry long before its spin-off.

Lofty Aspirations
GNA has the current goal of becoming the most successful company in the steel production industry. In recent news, the firm has decided to take a step towards this goal by improving its downstream operations. In November of last year, it entered into a joint venture with Pacific Coast Steel, Inc. and affiliate Bay Area Reinforcing to create Pacific Coast Steel. With a controlling interest in the firm, GNA will expand its reinforcing steel reach into the west coast, with planned projects throughout California and Nevada. This comes after a mid-year acquisition of the Oklahoma mini-mill producer of long steel products, Sheffield Steel Corporation.
steel
The steel industry as a whole is predicted to see some decline in 2007 but the factors affecting this decline may never touch GNA. The main problems confronting the sector include a decline in the automotive and residential industries, and predicted slower growth of the overall U.S. economy. Non-residential construction is seen, by industry analysts, as the sole point that steel companies can bet on.

Considering that GNA gets most, if not all, of its business from non-residential builders and contractors, this might prove to be a year in which GNA dominates the industry. The company also tries to gain a competitive edge by introducing innovative products such as ZBAR, a new type of reinforcing steel bar that extends the life of concrete structures by protecting against corrosion.

I am not not the only one to recognize the firm, as JP Morgan imitated research coverage on the firm January 10, 2007 with rating of “overweight.” The company will release earnings and hold a conference call 2/7 after the market closes.

Financials
Analyzing the current fundamentals of GNA, we can see a solid trailing twelve month gross margin of 19.05% and operating margin of 12.12% which is just below the industry average of 13.46%. Its impressive return on equity [ROE] of 21.32% over the past year is also indicative of potential stock appreciation for the future.

As for the present valuation of GNA, its price to earnings [P/E] ratio of 7.25 is materially lower than the 10.53 average of its competitors. In addition, its price to book [P/B] value is significantly below the average industry P/B of 2.32 posted by its peer group. This indicates that GNA should be closely watched in 2007. If it continues to grow its current operations and raises the top line, it all may fall to the bottom line. If this occurs, the stock may experience significant growth as the market bring its P/E more in line with its peers.

Disclosure: Gerdau AmeriSteel Corp. [GNA], is a constituent in the Clear Spin-Off index licensed for the Claymore/Clear Spin-Off ETF [AMEX:CSD]. Mr. Corn is CEO and founder of Clear Indexes LLC which publishes the index and he owns shares of the ETF: CSD. He does not directly own shares in [GNA].

GNA 1-yr chart

gna chart