Brazilian Steelmaker Drops 15% After Earnings: Time To Buy?

| About: Companhia Siderurgica (SID)

By Sean Geary

Brazil’s second-largest steelmaker Companhia Siderúrgica Nacional (NYSE:SID) has dropped 15% in the past week in the wake of sub-par earnings. Now at a 52-week low, is it time to buy the iron ore and steel producer?

Like many Brazilian companies whose revenues are in reals, SID’s stock price has struggled thanks to Brazilian government and central bank policy weakening the real. ADRs, which are dollar-denominated, are thus particularly susceptible to losses from a decreasing home currency against a flat or strengthening dollar.

Furthermore, weakening Chinese demand for steel has hurt iron ore prices, which naturally adversely affects the bottom line of steel companies. Although the Chinese economy is not all doom-and-gloom at this point, the facets of the Chinese economy that are responsible for the bulk of Chinese steel demand - namely housing and industrial production, continue to look weak, which means steel prices could face sustained pressure.

The basic bullish case for SID involves both bullish Chinese production (which is unlikely to come to fruition) and Brazil having to undertake a number of massive projects to build new stadia and improve underdeveloped transportation infrastructure for the upcoming 2014 Soccer World Cup and 2016 Summer Olympics, which will require significant steel purchases. On their conference call last week, SID management indicated that the company could even see an increase in prices within Brazil this year.

While the company is at a 52-week low, it looks a little too early for investors to jump in. Global steel demand continues to wane; the Brazilian government, at the risk of stoking inflation, looks intent on seeing the real weaken further.

Technically, unless the stock finds support here to form a double-bottom, it looks like SID may try to test its 2008 lows. However, if SID were to drop as far under as 5.50, the stock’s compelling valuation would likely outweigh near-term global and monetary policy concerns for long-term investors.