Gerdau (GGB, Financial) is seeing tough conditions in the steel industry. The overcapacity of approximately 690 million tonnes of steel, as well as softer demand for steel in markets like Brazil and other countries such as Latin America, impacted its results to a great extent in 2014. However, the company has started fiscal 2015 on positive notes as these conditions have eased down in the steel industry.Â
Smart initiatives
The company is executing various strategic initiatives such as lowering the overall costs, improving infrastructure, enhancing capacity and improvising manufacturing techniques. For example, the company has recently started with its ending line of hot-rolled, coiled strips at its Ouro Branco mills in Minas, Brazil. This mill remains quite competitive in the current market scenario and should deliver profit to Gerdau in the long-run.
Further, the company plans to start a new rolling mill and a reheating furnace at the Monroe Mill in Michigan. This should carry a competitive advantage for Gerdau going forward as this mill allow the company to produce improved quality products. Also, it should simultaneously expand productivity of the unit.
Moreover, the company has recently entered into a joint venture with Corsa. This joint venture is expected to start melt shop production in Mexico. This mill has an installed based annual capacity of 700,000 tons of rolled products and approximately 1 million tons of steel. This project is expected to go online at the start of fiscal 2015. The company expects this plant to effectively serve construction sector, metal construction, foundations, and retaining walls. Also this plant will enable the company to cater into industrial building projects and manufacturing in Mexico and the other countries part of NAFTA.
Apart from these smart initiatives, the company is selling-off its non-core assets in order to improve its operational efficiency. Gerdau had 50% stake in Gallatin Steel the rest was held by ArcelorMittal. Both these companies sold their Gallatin stakes to Nucor (NUE). This move will help Gerdau to focus more on the long-steel and specialty steel segment in North America.
Gerdau can make a comeback on the back of strengthening conditions in the non-residential and industrial sectors in the United States.
This is good news for Gerdau as the growing consumption level will reduce the pressure of oversupply in the market. Gerdau looks strong to exploit this positive momentum in home as well as in the international markets to make up for the losses this year.
Conclusion
Moreover, Gerdau shares one of the cheapest valuations in the industry. It has forward P/E multiple of 3.60, which is below its trailing P/E of 11.91. This indicates that the stock has a lot of potential to grow and deliver returns to its shareholders in the long-run. Its balance sheet carries total cash of $1.83 billion and has total debt of $6.12 billion. It has operating cash flow of $806.02 million and levered free cash flow of $44.64 million.
