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Here’s Why You Should Hold on to Companhia Siderurgica Now

Zacks

We issued an updated research report on Companhia Siderúrgica Nacional SID or CSN on Jun 14.

This Brazilian steel producer currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $3 billion.

Let’s delve deeper and discuss the company’s potential growth drivers and possible headwinds.

Factors Aiding CSN

Favorable Operating Conditions: We believe that Brazilian companies like CSN will benefit from an increase in infrastructural investments by the Brazilian authorities in the future. In addition, improvement in the domestic economy as well as strengthening automotive, construction and capital goods sectors will create lucrative market conditions for the company. On a broader perspective, the healthy global economy is likely to spur investments in advanced nations and subsequently boost the need for steel in these countries. According to the World Steel Association, global steel demand is projected to grow 1.8% year over year in 2018 and 0.7% in 2019. Demand for steel in Central and South America are projected to increase by 6.2% in 2018 and 4.9% in 2019.

Diversity a Boon: CSN serves customers in various end-markets, including packaging, automotive and construction. Also, the company’s solid product portfolio — comprising of hot- and cold-rolled flat steel, galvanized sheets and tin plates as well as operations in various nations — works in its favor.

Moreover, the company’s diversified business structure — including core business of steel and businesses of iron-ore mining, logistics, cement and energy — is a boon. It’s worth noting here that healthy growth in sales of Steel, Logistics, Cement and Energy segments offset weakness in the Mining segment in the first quarter of 2018. The company’s revenues in the quarter grew 14.8% year over year.

Strategic Initiatives: CSN has been consistently engaged in improving its production capabilities and services, as evident from roughly R$1,065 million capital spent in 2017 and R$1.1 billion planned for 2018. Of the total amount for 2018, approximately R$393 million will be used for the mining business while R$581 million will be used for steel, R$60 million for cement and R$54 million for miscellaneous purposes.

For the Cement segment, CSN plans to carry out maintenance projects at two clinker production units at Arcos. For the Mining segment, the company plans to enhance iron-ore quality at its Casa de Pedra mine and work on the capacity expansion of the port in Itaguaí/RJ. For the Steel segment, the company intends to refurbish blast furnace, steel mill, coking ovens and others while carrying on maintenance projects and enhance technology at the UPV.

Factors Working Against CSN

Poor Share Price Performance and Valuation: In the past three months, CSN’s shares have declined 11%, underperforming 1.9% growth recorded by the industry. Also, on a P/E (TTM basis), the stock looks overvalued compared with the industry, based on respective tallies of 9.1x and 7.5x in the past three months.



Rising Costs & Expenses Raise Concerns: CSN is dealing with adverse impacts of rising costs and operating expenses. Notably, the company’s cost of sales in the last five years (2013-2017) grew at 1.8% (CAGR) while its operating expenses (including selling expenses and general and administrative expenses) went up 10.5%. The trajectory continued in first-quarter 2018 as well, with cost of sales and operating expenses increasing 19.1% and 16.1% from their respective tallies in the year-ago comparable quarter. Gross and adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margins in the reported quarter decreased 260 and 570 basis points, respectively. We believe that unwarranted rise in costs and expenses will prove detrimental to the company’s margins and profitability.

Long-Term Debt: CSN is a highly leveraged company. Exiting the first quarter of 2018, its borrowings and financing balance was approximately R$23.3 billion, reflecting 1.5% sequential growth. Its net debt was at R$26.5 billion. The company’s net debt/adjusted EBITDA ratio was at 5.82, higher than 5.66 at the end of the previous quarter and 5.45 at the end of the year-ago quarter. We believe, if unchecked, high-debt levels can inflate the company’s financial obligations and put pressure on margins.

CSN is a highly-leveraged company. Exiting the first quarter of 2018, its borrowings and financing balance was approximately R$23.3 billion while net debt was R$26.5 billion. Its net debt/adjusted EBITDA ratio was at 5.82, higher than 5.66 at the end of the previous quarter and 5.45 at the end of the year-ago quarter.

Stocks to Consider

Some better-ranked stocks in the industry include Ternium S.A. TX, ArcelorMittal MT and Universal Stainless & Alloy Products, Inc. USAP. While Ternium S.A. sports a Zacks Rank #1 (Strong Buy), both ArcelorMittal and Universal Stainless & Alloy Products carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last 60 days, earnings estimates for each of these stocks improved for the current year. Also, average positive earnings surprise for last four quarters was 50.23% for Ternium and 40.07% for ArcelorMittal. For Universal Stainless & Alloy Products, earnings surprise in the first quarter of 2018 was a positive 21.74%.

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