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Gerdau Ameristeel Is a Hot Stock

The company's sales growth and pricing power should help its stock perform well.

Gerdau Ameristeel (GNA) , which reported earnings on Monday up 22% percent over the first quarter a year ago, is a hot stock.

Even the leading shareholder of Gerdau Ameristeel,

Gerdau SA

(GGB) - Get Gerdau S.A. Report

-- the Brazilian steel company that owns 66% of GNA -- could be an attractive investment in the steel industry.

Gerdau SA has an enterprise value of only 3.8 times the estimated 2009 EBITDA cash flow measure, which is extremely low.

Compare this to the 50 largest global steel stocks, which on average trade at eight times 2009 projected cash flow -- more than double Gerdau SA's valuation. The parent company certainly looks attractive.

Here's what's so hot about Gerdau Ameristeel: it's under the radar.

The top three steel stocks in North America are


(NUE) - Get Nucor Corporation Report


U.S. Steel

(X) - Get United States Steel Corporation Report

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AK Steel

(AKS) - Get AK Steel Holding Corporation Report

. Those companies have total stock-market capitalizations of $23 billion, $20 billion and $8 billion, respectively.

At the current stock price, Tampa, Fla.-based Gerdau Ameristeel is just under $7 billion in market value, so it ranks fourth among the North American steel stocks.

The pricing environment is favorable across all steel product categories. While the U.S. transportation and housing sectors may be in a slump, steel prices in the U.S. are still below international steel market prices.

Even prices for nonprime scrap steel are experiencing an upturn, which suggests that low-cost alternative supplies are less a factor now, especially with international demand up from China and India.

Expect even higher steel prices.

In addition, Gerdau Ameristeel has real financial flexibility, given the cash from operations, recent equity raised and the low 4.7% cost of its debt. The company has the ability to keep growing.

Acquisitions have been the key to the company's top-line volume gains.

Gerdau acquired Chaparral Steel last year for $4.2 billion. The value of this is already starting to show up in the top line. Net sales for the quarter were up 54% to $2 billion. The bottom line is also helped, with the company achieving $75 million in annual cost savings and synergies from prior acquisitions.

Next quarter's results will also include the MACSTEEL and Century Steel acquisitions. The company spent $2 billion on these, and they closed in April. These should add even more sizzle to the year-over-year comparisons.

Things have changed for the steel industry, but some investors still view the smaller companies in this industry, such as Gerdau Ameristeel, as less attractive. To do so would be a mistake.

Rudy Martin is the former director of research for Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter.