Brazil Import Pressures Will Strain Margins Though Efficiencies Will Improve

Key Takeaways

• Global infrastructure demand, recycled steel, and energy investments support growth, but import competition and regulatory delays in Brazil could undermine margins and revenue.
  
• High CapEx and technology investments boost ESG performance, yet risks from alternative materials, protectionism, and execution shortfalls may challenge future profitability and capital allocation.
  
• Competitive imports, regulatory uncertainty, high CapEx, and volatile demand threaten Gerdau's margins, cash flow, and profitability despite U.S. market opportunities.

Catalysts

Operates as a steel producer company.

• While Gerdau benefits from ongoing global infrastructure investment and rising demand for recycled, lower-emission steel-both of which should support higher volumes and margin expansion in its core North American and Latin American markets-the company is exposed to prolonged regulatory delays and ineffective trade protection in Brazil, potentially leading to continued market share erosion and sustained margin pressure domestically.
  
• Although significant investments in mining, electric arc furnace technology, and energy self-sufficiency are expected to yield incremental EBITDA and cost reductions from 2025 onward, the rapid influx of imported steel and lack of decisive government action on import controls threaten to dilute these gains by depressing prices and utilization rates in the Brazilian market, directly impacting revenue growth and return on capital.
  
• While Gerdau's strong position in specialty steels and structural products in North America aligns well with the ongoing industrial buildout and the renewable energy transition, the company still faces secular risks from possible substitution by alternative materials such as composites and aluminum in key markets, which could cap future revenue growth and limit pricing power.
  
• Despite healthy cash flow generation, robust balance sheet, and accelerated share buybacks at seemingly attractive valuations that should support EPS growth, the company's elevated CapEx in recent years-driven by one-off expansions-may prove less accretive if global protectionism rises or Latin American economies underperform, straining free cash flow and potentially necessitating discipline on future capital allocation.
  
• While energy investments and focus on recycled steel bolster Gerdau's ESG credentials and may create a cost and compliance advantage in a decarbonizing world, any underinvestment versus global peers in next-generation green steel technologies or delays in scaling these projects would erode net margins and limit Gerdau's ability to expand premium offerings for export and higher-margin domestic sales over the next decade.

Gerdau Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Gerdau compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Gerdau's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 5.9% in 3 years time.
• The bearish analysts expect earnings to reach R$4.5 billion (and earnings per share of R$2.72) by about July 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 bearish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 10.5x today. This future PE is greater than the current PE for the US Metals and Mining industry at 8.0x.
• Analysts expect the number of shares outstanding to decline by 3.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.88%, as per the Simply Wall St company report.

Gerdau Future Earnings Per Share Growth

Risks

• The continued and rising influx of low-priced imported steel into Brazil, combined with ineffective government quota and tariff systems, increases competitive pressure and reduces Gerdau's domestic pricing power, posing a risk of margin compression and lower revenues over the long term.
  
• Persistent uncertainty around government trade defense measures in Brazil and the slow response to closing regulatory loopholes or implementing effective protection exposes Gerdau to ongoing market share erosion and weaker net margins in its largest market.
  
• Heavy capital expenditures tied to productivity and cost-reduction projects, along with delays or lack of clarity regarding the scale-back of future CapEx, could lead to elevated depreciation and strain on free cash flow, ultimately impacting earnings and limiting dividend growth.
  
• Despite optimism about the U.S. nonresidential construction sector and product niche exposure, the risk of U.S. economic deceleration or recession, coupled with only partial protection from tariffs, could soften steel demand and reduce volumes, creating volatility in both North American revenue and profitability.
  
• Gerdau's aggressive pricing strategy to maintain market share in commoditized rebar and long steel markets may result in sustained pressure on profitability and overall net income, particularly if industry overcapacity persists and alternative materials or imports continue to replace steel in key segments.

Valuation

• The assumed bearish price target for Gerdau is R$17.0, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be R$75.5 billion, earnings will come to R$4.5 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 19.9%.
• Given the current share price of R$16.91, the bearish analyst price target of R$17.0 is 0.5% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• 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.