Investments In Ouro Branco And Midlothian Will Improve Operational Efficiency

Key Takeaways

• Strategic investments in production and renewable energy initiatives could boost margins, reduce costs, and support decarbonization efforts.
  
• Strong cash management through share buybacks and disciplined capital allocation enhances shareholder value and earnings per share.
  
• Competitive pressures and economic uncertainties across key markets threaten Gerdau's profitability and revenue, particularly due to domestic demand challenges and geopolitical trade risks.

Catalysts

Operates as a steel producer company.

• Gerdau's investments in the Ouro Branco unit in Minas Gerais, which will add new hot coil rolled strip capacity in the first quarter of 2025, are expected to enhance Gerdau's product mix and reduce reliance on semi-finished products, potentially boosting revenues and margins.
  
• The completion of ongoing strategic projects, such as the Midlothian expansion in Texas and Itabirito's mining project in Minas Gerais, is likely to significantly improve operational efficiency and cost structure, benefiting future earnings.
  
• Gerdau's acquisitions of small hydropower plants and investments in solar farms aim to increase renewable energy production, which aligns with their decarbonization process and could lead to cost savings and improved net margins.
  
• North America's improved market outlook, attributed to the updated trade defense measures and a recovering order book, is expected to enhance capacity utilization and increase revenues in the coming year.
  
• Gerdau's share buyback program and disciplined capital allocation for competitive projects signal strong cash flow management and focus on shareholder value, which could positively impact earnings per share.
  

Gerdau Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gerdau's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 7.3% in 3 years time.
• Analysts expect earnings to reach R$5.8 billion (and earnings per share of R$2.8) by about March 2028, up from R$4.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 7.5x today. This future PE is greater than the current PE for the US Metals and Mining industry at 7.4x.
• Analysts expect the number of shares outstanding to decline by 2.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.55%, as per the Simply Wall St company report.

Gerdau Future Earnings Per Share Growth

Risks

• The high penetration of imported steel in Brazil, even with the tariff quota system, poses a risk to Gerdau's local steel demand and could impact revenue negatively if domestic demand is cannibalized.
  
• Rising inflation and high interest rates in Brazil may lead to reduced local demand for steel in the coming months, potentially affecting net margins as domestic sales decrease.
  
• The uncertainty around U.S. trade policies and tariffs, including potential tariffs against Canada, could negatively influence Gerdau's North American operations and impact earnings due to supply chain disruptions or increased costs.
  
• The market entry of additional rebar capacity in Brazil could intensify competition and pressure prices, potentially reducing profit margins in this segment.
  
• A slowdown in the light and heavy vehicle markets, due to high interest rates, may adversely affect the demand for special steels, impacting Gerdau's revenue and profitability from this segment.

Valuation

• The analysts have a consensus price target of R$25.0 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$31.0, and the most bearish reporting a price target of just R$19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$79.6 billion, earnings will come to R$5.8 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 20.6%.
  
• Given the current share price of R$16.8, the analyst price target of R$25.0 is 32.8% 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.