Gerdau: Earnings Preview

Aug. 1.11 | About: Gerdau S.A. (GGB)

Gerdau S.A. (NYSE:GGB) is slated to release its second quarter 2011 results on Thursday, August 4. The current Zacks Consensus Estimate for the second quarter is 32 cents, representing an annualized growth of 10.34%.

Considering the earnings surprise, Gerdau outperformed the Zacks Consensus Estimate in one quarter, while underperforming in two others and was in line with one quarter. The average surprise stands at a negative 7.67%, reflecting the magnitude of under performance in the trailing four quarters.

First Quarter Highlights

Gerdau’s first quarter 2011 results were disappointing as the company’s net income plummeted 29% year over year to R$409 million (US$246.4 million). Earnings per share (NYSEARCA:EPS) were R$0.26 (16 cents per ADR) down compared with R$0.35 (19 cents per ADR) in the year-ago period. Results were, however, above the Zacks Consensus Estimate of 8 cents per ADR.

Net revenue was R$8,363.8 million ($5,038.4 million), up 17.7% year over year and 7% sequentially. The revenue increase was primarily due to higher shipments in the quarter. Crude steel production increased 9% year over year and 8% sequentially to 4,749 million tons in the quarter, primarily due to growing demand globally.

Detailed discussion on the second quarter results can be found here: GGB's 1Q Plummets on Expenses

Agreement and Magnitude of Estimate Revisions

In the last 30 days, there were no estimate revisions in earnings estimates for the second quarter and fiscal year 2011 and 2012.

Estimates were stable at 32 cents for the second quarter of 2011, $1.23 for the fiscal year 2011 and $1.59 for fiscal year 2012. The fiscal year estimates represented a year –over- year growth of 50.0% for 2011 and 29.27% for 2012.

Our Take

Results in the third quarter 2011 are expected to be impressive and nearly double of what the company reported in the previous quarter. The current Zacks Consensus estimate stands at 32 cents, representing a 100% sequential increase.

The outlook for the quarter gets a boost from the World Steel Association forecast of a 6% rise in steel demand worldwide, compared with 5% expected earlier. The Brazilian steel industry is also experiencing heavy demand from the construction and manufacturing industries.

Despite the positive momentum, we remain concerned about higher raw material costs which largely impacted the first quarter results. The company experienced a 26% increase in cost of sales leading to poor margins in the quarter.

We currently maintain a Neutral recommendation on the company.