Accelerating North American Demand Will Unlock Long-Term Value

Key Takeaways

• North American focus and expansion into value-added steel drive revenue growth, pricing power, and market share while mitigating industry cyclicality.
  
• Cost-reduction initiatives and operational efficiencies support margin improvement, robust cash flow, and sustained shareholder returns through buybacks and dividends.
  
• Weak trade defenses, challenging macro conditions, global overcapacity, and cautious capital allocation threaten Gerdau's growth, margins, and future shareholder returns, especially in Brazil.

Catalysts

Operates as a steel producer company.

• Robust demand for steel products in North America-driven by accelerating infrastructure buildout, manufacturing reshoring, and the energy transition (e.g., solar, data centers, energy grid projects)-is supporting sustained high capacity utilization and record order backlogs; this is likely to bolster Gerdau's revenue growth and pricing power.
  
• Strategic capital allocation pivot toward North America, where structural trends favor domestically produced steel due to trade protection and reindustrialization, positions Gerdau to maintain and grow market share in high-margin segments, directly supporting EBITDA and net income.
  
• Significant investments in cost-reduction and competitiveness projects, including the ramp-up of the Miguel Burnier mining project and advanced electric arc furnace (EAF) technology, are expected to materially reduce production costs and improve margins, with incremental EBITDA (approx. R$1.1 billion) beginning to be realized from 2026 onwards.
  
• Expansion into value-added and specialty steel products for automotive, construction, and renewable energy sectors both in Brazil and North America is increasing revenue diversification and supporting margin growth, helping soften the industry cyclicality's impact on earnings.
  
• Strong balance sheet discipline and high cash generation-facilitated by reduced CapEx levels post-2026, greater operational efficiencies, and North American cash flows-should allow for continued aggressive share buybacks and dividend payouts, directly enhancing earnings per share and shareholder returns.

Gerdau Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Gerdau's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 9.7% in 3 years time.
• Analysts expect earnings to reach R$7.5 billion (and earnings per share of R$3.07) by about July 2029, up from R$1.6 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.3x on those 2029 earnings, down from 28.7x today. This future PE is lower than the current PE for the US Metals and Mining industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 1.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.07%, as per the Simply Wall St company report.

Risks

• High and persistent steel imports into Brazil due to ineffective trade defense measures have resulted in significant market share loss and margin compression for domestic producers, prompting Gerdau to curtail future investment in its home market-this could structurally reduce the company's Brazilian revenue base and profitability over time.
  
• Ongoing exposure to unfavorable or volatile macro conditions in Brazil and Latin America, including high interest rates, economic deceleration in key sectors such as automotive and agriculture, and currency risk, may further pressure Gerdau's margins, net income, and overall earnings variability.
  
• The global steel industry continues to struggle with excess capacity-particularly from subsidized or low-cost Chinese producers-which sustains downward pressure on international steel prices and threatens both Gerdau's average realized prices and profitability in the long run.
  
• Gerdau's high capital allocation toward maintenance and cost-reduction projects rather than capacity expansion, coupled with planned reductions in Brazilian CapEx post-2026, could lead to lower growth or insufficient reinvestment, potentially constraining future revenue growth and recovery in Brazilian operations.
  
• The company's increasing gross debt and temporary negative free cash flow, driven by large CapEx and shareholder returns, place pressure on financial flexibility; if North American market conditions soften or Brazilian recovery stalls, Gerdau's ability to maintain current dividend and buyback levels-and thus shareholder returns-could be at risk.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of R$27.1 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$32.0, and the most bearish reporting a price target of just R$22.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be R$77.4 billion, earnings will come to R$7.5 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 22.1%.
• Given the current share price of R$23.91, the analyst price target of R$27.1 is 11.8% 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.