Steel company Gerdau is standing out today, surging to $5.58 and marking a 4.7% change. In comparison the S&P 500 moved only -0.2%. GGB is -17.7% below its average analyst target price of $6.78, which implies there is more upside for the stock. Over the last year, Gerdau shares have outperformed the S&P 500 by 30.6%, with a price change of 15.1%.
Gerdau S.A., together with its subsidiaries, operates as a steel producer company in the Americas. The company is included in the basic materials sector, which groups together the steel, coal, precious metals, chemical, and copper industries. From miners to producers, what these companies have in common is a strong correlation between their stock price and the strength of current economic conditions.
This is why basic materials companies are considered to be cyclical stocks. A well-timed investment at the beginning of an economic upswing can offer strong returns, but investing during a downturn may result in months or even years of mediocre performance.
Gerdau's trailing 12 month P/E ratio is 3.0, based on its trailing Eps of $1.83. The company has a forward P/E ratio of 7.9 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.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Gerdau's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -4.12. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing GGB's growth potential .
To better understand the strength of Gerdau's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
GGB's gross profit margins have averaged 16.0% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are increasing strongly based on their four year average gross profit growth rate of 34.5%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Gerdau's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 12,516,933,000.0 | -3,026,023,000.0 | 9,490,910,000.0 | 99.51 |
| 2020-12-31 | 6,407,906,000.0 | -1,650,778,000.0 | 4,757,128,000.0 | 4682.62 |
| 2019-12-31 | 1,642,792,000.0 | -1,746,600,000.0 | -103,808,000.0 | -112.9 |
| 2018-12-31 | 1,999,683,000.0 | -1,194,934,000.0 | 804,749,000.0 | n/a |
- Average free cash flow: $3,737,244,750.00
- Average free cash flown growth rate: 1556.4 %
- Coefficient of variability (the lower the better): 117.1 %
Free cash flow 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 a positive cash flow as of the last fiscal year, GGB is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by 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.
Gerdau is by most measures undervalued because 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. The stock has poor growth indicators because it has a a negative PEG ratio and weak margins. We hope you enjoyed this overview of GGB's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.
