Cost Savings And Product Mix Changes Will Improve Future Efficiency In Steel Sector

Key Takeaways

• Cost reduction efforts and a strategic product mix are set to improve margins and efficiency, enhancing Gerdau's financial performance.
  
• Anticipated North American demand growth and shareholder-friendly actions signal positive revenue outlook and strong shareholder returns.
  
• Increased global steel supply and rising imports threaten Gerdau's revenues and margins across various markets.

Catalysts

Operates as a steel producer company.

• Gerdau's cost reduction initiatives are on track to deliver R$1.5 billion in savings by the start of 2025 compared to the 2023 base. This should positively impact net margins as the company reduces expenses and improves efficiency.
  
• The anticipated positive outlook for 2025 in the North American market, driven by expected economic recovery post-presidential elections, federal incentive packages, and potential trade policies, could increase demand and prices, thus bolstering revenues.
  
• Gerdau's decision to strategically shift product mix and increase flexibility in its North American operations, especially by focusing on higher-margin structurals and merchant bars, is likely to improve revenue and net margins.
  
• The ongoing share buyback program and dividend payouts suggest strong shareholder return commitments, potentially improving earnings per share if shares are being repurchased and canceled.
  
• Optimized asset use and improved operational efficiency, particularly in Brazil, amid a challenging environment, indicate that Gerdau is preparing for future capacity increases and potential revenue growth despite current market conditions.

Gerdau Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gerdau's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 6.4% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being R$4.8 billion (with an earnings per share of R$3.32).
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 8.9x today. This future PE is lower than the current PE for the US Metals and Mining industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 10.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.98%, as per the Simply Wall St company report.

Gerdau Future Earnings Per Share Growth

Risks

• The ongoing oversupply of steel in the global market poses a risk to Gerdau’s future revenues, as this increased supply can depress steel prices and reduce Gerdau's ability to maintain profitable price levels.
  
• The increase in steel imports into Brazil, which was almost 80% higher than the historical average, continues to impact Gerdau’s shipments despite domestic demand, threatening revenue and market share.
  
• Gerdau faces significant competition in North America, with expected price pressures further exacerbating margin compression in the U.S. market due to increased steel imports and market fluctuations.
  
• The potential ineffective trade defense measures in Brazil might not effectively curb imports, which could limit Gerdau’s ability to capitalize on domestic demand increases, impacting revenue and margins.
  
• In South America, especially in Argentina, economic challenges forecast reduced steel demand, potentially leading to decreased revenues and impacting the financial performance of that division.

Valuation

• The analysts have a consensus price target of R$25.85 for Gerdau based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$30.0, and the most bearish reporting a price target of just R$23.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$75.6 billion, earnings will come to R$4.8 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 20.0%.
• Given the current share price of R$21.0, the analyst's price target of R$25.85 is 18.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.