Emerging Urbanization And Renewable Investments Will Drive Green Steel Expansion

Key Takeaways

• Momentum in U.S. reshoring, green infrastructure, and urbanization positions Gerdau for outsized growth, margin expansion, and structural advantage in high-value steel markets.
  
• Operational efficiency, self-sufficient iron ore supply, and green steel leadership unlock sustainable cost and profitability gains, strengthening Gerdau's industry leadership and premium pricing power.
  
• Heightened import competition, global overcapacity, sector dependence, and rising environmental standards threaten Gerdau's margins, growth prospects, and technological competitiveness.

Catalysts

Operates as a steel producer company.

• Analysts broadly agree that Gerdau's North American operations are benefiting from strong nonresidential construction demand, but this may understate the upside: the ongoing reshoring trend in the U.S., accelerating green infrastructure investments, and U.S. manufacturing revival could drive a multi-year surge in high-margin steel orders, substantially expanding revenue and EBITDA beyond current forecasts.
  
• Analyst consensus sees the Miguel Burnier mining project as a moderate EBITDA booster, but this likely undervalues its transformative impact; by integrating secure, low-cost, high-quality iron ore supply and reducing dependence on external pellets, Gerdau substantially lowers cost per tonne and volatility, which can drive structural margin expansion and unlock an incremental annual EBITDA boost that could materially lift bottom-line earnings.
  
• Gerdau's leadership in low-emission steelmaking and extensive scrap recycling positions it as a frontrunner to capture outsized share in the rapidly expanding global "green steel" market, as both governments and global OEMs accelerate sourcing from ultra-low-carbon suppliers-this will allow Gerdau to command premium pricing, further expanding gross margins and revenue over the long term.
  
• The increasing pace of urbanization and sustained infrastructure build-especially in high-growth emerging markets across Latin America-will provide a strong and underappreciated runway for Gerdau's specialized construction steels, setting the stage for outperformance in core end markets and supporting above-peer revenue growth.
  
• Automation, digitalization, and advanced process investments across Gerdau's key mills are on the cusp of delivering significant fixed cost reduction and superior operational efficiency, leading to lower break-even points, improved working capital turnover, and a step-change in operating margins and free cash flow generation.

Gerdau Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Gerdau compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Gerdau's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.7% today to 7.6% in 3 years time.
• The bullish analysts expect earnings to reach R$6.4 billion (and earnings per share of R$3.25) by about August 2028, up from R$3.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the US Metals and Mining industry at 9.5x.
• Analysts expect the number of shares outstanding to decline by 5.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.59%, as per the Simply Wall St company report.

Gerdau Future Earnings Per Share Growth

Risks

• Increasing steel imports in Brazil, coupled with ineffective government trade defense mechanisms, are forcing Gerdau to scale down future capital investments and production in its core market, which reduces future revenue and earnings potential from Brazil.
  
• Ongoing overcapacity in the global steel industry, particularly supply gluts from China, is driving down steel prices and causing severe margin pressure for Gerdau, leading to declining profitability and putting both revenue and net margins at risk.
  
• Gerdau's over-reliance on the construction sector, especially in Brazil and North America, exposes the company to regional economic downturns and cycles in infrastructure or real estate activity, which could result in unpredictable and potentially shrinking revenues.
  
• The company's decision to reduce capital expenditures in Brazil after 2026 may result in underinvestment in next-generation steelmaking technologies, risking a widening cost gap versus more advanced competitors and putting long-term net margins under pressure.
  
• Global decarbonization efforts and stricter climate regulations pose the risk of increased compliance costs for Gerdau's steel operations, and as the market gradually shifts to lower-emissions materials and alternative construction products, future revenue streams and earnings could be structurally challenged.

Valuation

• The assumed bullish price target for Gerdau is R$27.5, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Gerdau's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$27.5, and the most bearish reporting a price target of just R$17.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be R$85.0 billion, earnings will come to R$6.4 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 20.6%.
• Given the current share price of R$16.3, the bullish analyst price target of R$27.5 is 40.7% 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.