Gerdau S. A.’s (GGB) weak financial results in the fourth quarter of 2010, though negatively impacted the company’s stock price, failed to move analysts’ sentiments who kept their estimates somewhat stable following the company’s earnings release.
Earnings Review
On March 3, 2011, Gerdau released its fourth quarter and fiscal year 2010 financial results. The company’s fourth quarter 2010 net income plummeted 35% year over year to R$420 million ($248.5 million) and registered a 31% sequential decline.
Earnings per share (EPS) were R$0.29 ($0.17 per ADR), compared with R$0.45 ($0.30 per ADR) in the year-ago period and below the Zacks Consensus Estimate of $0.18 per ADR.
The bottom-line results were negatively affected by higher cost of sales and operating expenses, which more than offset by higher revenue in the quarter.
In the fiscal year 2010, earnings per share were R$1.50 ($0.86 per ADR), up compared with R$0.79 ($0.74 per ADR).
Net revenue was R$7,799.8 million ($4,615.3 million), up 23% year over year, but down 5% sequentially. The revenue increase was primarily due to higher shipments in the quarter. In the fiscal year 2010, net revenue was R$31,393.2 million ($18,575.9 million), up 18% year over year.
Detailed discussion on the earnings release can be found here: Gerdau 4Q Plummets, Expenses Soar
Agreement of Analysts
In the last 7 days, earnings estimates for the fiscal year 2011 and 2012 remained stable with no revisions from the analysts covering the stock. Estimate for the first quarter 2011 also remained unchanged.
Magnitude of Estimate Revisions
In the last 7 days, earnings estimates for the fiscal year 2011 remained stable at $1.31 per share and that for 2012 at $1.94. First quarter estimate also remained unchanged at 20 cents per share.
Estimate for the first quarter reflected no growth on a year-over-year basis while that for the fiscal year 2011 reflected a 60.24% yearly growth. Estimate of 2012 represented a 47.45% year-over-year growth.
Our Take
We believe that Gerdau S.A. is one of the leading Brazilian steel makers which stands at an advantageous position to leverage from the growing world steel market. Global steel demand is projected to increase by 5% in 2011, according to the World Steel Association.
The Brazilian steel industry will probably get a boost as steel demand from the manufacturing and construction industries grows, besides, the fact that the country will also host the 2014 World Cup soccer championships and the 2016 Rio de Janeiro Olympics is also worthy of note.
Moreover, Gerdau’s growing businesses and increasing self-sufficiency in raw materials (mineral resources) are encouraging attributes.
However, these positives in the near term seem to be overshadowed by risks arising from volatility in the price of raw materials, foreign currency fluctuation, cyclicality of the industry and stiff competition; all of which pose threat to the company.
The financial results of the company over the last two quarters have been severely affected by higher costs of raw materials, which more than offset higher revenue growth. Continuous increase in raw material prices in the quarters ahead can be detrimental to the company’s financial performances.
We currently maintain an Underperform recommendation on Gerdau.
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