Ouro Branco And Miguel Burnier Expansion Will Improve Operations

Key Takeaways

• Expansion in production and strategic projects may boost revenue and net margins through increased capacity and operational efficiencies.
  
• Share buyback programs and potential CapEx reductions may enhance EPS and allow for reallocating capital to productive investments.
  
• High import levels, uncertain U.S. demand, and costly expansion efforts could pressure Gerdau's margins and impact free cash flow.

Catalysts

Operates as a steel producer company.

• The expansion of hot-rolled coil production capacity in Ouro Branco is expected to increase the share of high value-added products, potentially boosting revenue growth and improving net margins.
  
• The North American market shows a promising outlook with increased volumes and a growing order backlog, suggesting potential revenue growth and improved earnings, especially if the U.S. government's import tariffs further benefit capacity utilization.
  
• Investments in strategic projects such as the expansion in flat steel and mining capability at Miguel Burnier are anticipated to enhance operational efficiencies and provide additional EBITDA, potentially impacting net margins positively.
  
• Share buyback programs, supported by strong capital structure, are likely to continue returning value to shareholders and could enhance earnings per share (EPS) as the number of shares outstanding decreases.
  
• Potential reductions in CapEx disbursements in future years could allow for reallocation of capital to more productive investments or increased shareholder returns, potentially affecting earnings positively if efficiency improvements materialize.

Gerdau Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gerdau's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 6.6% in 3 years time.
• Analysts expect earnings to reach R$5.3 billion (and earnings per share of R$2.46) by about May 2028, up from R$3.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, up from 9.5x today. This future PE is greater than the current PE for the US Metals and Mining industry at 7.5x.
• Analysts expect the number of shares outstanding to decline by 3.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.57%, as per the Simply Wall St company report.

Gerdau Future Earnings Per Share Growth

Risks

• The Brazilian market faces challenges from high levels of imported steel, with a penetration rate reaching 22%, which may hinder Gerdau's domestic revenue and profitability.
  
• In the U.S. market, despite a current positive outlook, there are concerns about a more uncertain business environment and potential economic slowdown, which could impact future earnings.
  
• Expanding production capacity, such as the new hot-rolled coil mill in Ouro Branco, has increased costs and may pressure margins if demand doesn't meet supply, affecting net margins.
  
• The company's high CapEx, focused on projects like flat steel and mining expansion, might not deliver expected returns, potentially reducing free cash flow and increasing risk if market conditions worsen.
  
• Investor sentiment could be cautious due to reliance on factors like government trade defense policies, which remain uncertain, potentially affecting revenue consistency in competitive sectors like long steel.

Valuation

• The analysts have a consensus price target of R$23.533 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$18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$79.7 billion, earnings will come to R$5.3 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 20.6%.
  
• Given the current share price of R$15.37, the analyst price target of R$23.53 is 34.7% 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.