Thinking of Buying GGB's Dip? Consider This First.

Standing out among the Street's worst performers today is Gerdau, a steel company whose shares slumped -3.4% to a price of $5.15, 24.04% below its average analyst target price of $6.78. The average analyst rating for the stock is strong_buy.GGB underperformed the S&P 500 index by -3.7% during today's morning session, but outpaced it by 44.9% over the last year with a return of 25.1%.

Gerdau S.A., together with its subsidiaries, operates as a steel producer company in the Americas. The company belongs to the basic materials sector, which includes the chemical, coal, mining, aluminum, and steel industries. The demand for these materials is dependent on economic cycles: when the economy is growing, companies across all sectors ramp up production, which increases demand from basic materials companies.

Conversely, when the economy slows down, demand for these materials decreases. The stock prices of this sector tend to follow the ebbs and flows of these demand cycles -- but accurately predicting where we are presently in the economic cycle is a matter of intense debate.

Gerdau's trailing 12 month P/E ratio is 2.8, based on its trailing Eps of $1.85. The company has a forward P/E ratio of 7.3 according to its forward Eps of $0.71 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US basic materials companies is 8.57, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Gerdau market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.

Dividing Gerdau's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -4.12. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Gerdau's gross profit margin trends:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2021-12-31 78,345,081,000.0 57,527,721,000.0 26.57 96.23
2020-12-31 43,814,661,000.0 37,884,102,000.0 13.54 27.74
2019-12-31 39,644,010,000.0 35,440,726,000.0 10.6 -20.42
2018-12-31 46,159,478,000.0 40,010,100,000.0 13.32 n/a
  • Average gross margin: 16.0 %
  • Average gross margin growth rate: 34.5 %
  • Coefficient of variability (lower numbers indicating more stability): 44.8 %

We can see from the above that Gerdau business is not strong and its stock is likely not suitable for conservative investors.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Gerdau's free cash flow, which was $9,490,910,000.00 as of its most recent annual report.

This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, GGB is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 1556.4% and has on average been $3,737,244,750.00.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Gerdau's P/B ratio of 0.2 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Basic Materials sector was 1.86 as of the third quarter of 2022.

Since it has a very low P/E ratio, an exceptionally low P/B ratio, and an irregular stream of positive cash flows with an upwards trend, Gerdau is likely undervalued at today's prices. The company has poor growth indicators because of a negative PEG ratio and weak gross margins. We hope you enjoyed this overview of GGB's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.