Companhia Siderurgica: A ‘Steel’?

09/11/2014 10:00 am EST


Our latest foray into a foreign stock brings us to a diversified Brazilian materials company—mostly involved in steel—explains Briton Ryle, editor of The Wealth Advisory.

Companhia Siderurgica Nacional (SID) has been around since 1941 and was Brazil's first integrated flat steel producer. It has 8,000 employees and 5.8 million tons of capacity.

In 2001, Companhia Siderurgica Nacional gave itself a US presence by buying out Heartland Steel when it was in bankruptcy. The majority of its exports go to Asia, but it sells the most products in its domestic market.

In its most recent earnings report, 64% of revenue came from steel, 25% came from mining (mostly iron ore), 6% from logistics, and 3% each from cement and energy.

Overall, revenue for the quarter was $1.7 billion, with $1.24 billion coming from steel. Revenue for the previous quarter was $1.95 billion. The 7% sequential decline in total revenue was attributed to lower sales in mining and energy.

Year-over-year EBITDA earnings were up 19% to $577 million. That was still a 9% decline from the previous quarter, due to lower iron ore prices.

So far this year, Companhia Siderurgica Nacional has invested $422 million into the business. The mining segment took 40% of that. $106 million went to steel and the rest went to expanding its cement production capacity, as well as port and railway logistics.

Management says it expects business to improve in the second half of this year. And there's no doubt Brazil's meager 0.2% GDP growth in the first quarter of 2014 was disappointing. Second quarter GDP numbers aren't out yet, but they won't be a lot better. Brazil at least grew 2.5% in 2013.

There's no doubt that Brazil is hurt by China's economic slowdown. And Europe's difficulties aren't helping either.

Part of the problem with growth for Brazil was the World Cup. Entire cities shut down and industrial production fell to 2010 levels. Capacity utilization fell 68% during the World Cup, the worst drop ever recorded in Brazil.

The company is well-managed, it is investing to increase its production and it pays a 5.6% dividend (you should also be aware that Brazil does not tax dividends, so you should receive the entire amount).

We think there is upside for Brazil's economy. The question is: when? We're not sure. The shares have been considerably higher in the past; in 2010, they traded in a range between $14 and $20. We rate Companhia Siderurgica Nacional a "strong buy" under $4.50 a share. Our 12-month price target is $6.50.

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