Steel (HVK24) is an essential commodity used to build the global economy. In fact, 1.9 billion tons of steel are produced each year to build vehicles, machinery, bridges, and much more. In recent years, specialty metals have somewhat replaced steel, but the long-term demand for the commodity remains robust.
Given these factors, it makes sense to invest in steel-producing companies equipped with modern manufacturing capabilities and a low-cost base. One steel stock under $10 that has significant upside potential is Gerdau (GGB). Let’s see why.
Is Gerdau Stock a Good Buy?
Valued at a market cap of $7.5 billion, Gerdau is a Brazil-based company engaged in the production and commercialization of steel products.
Gerdau stock has underperformed the broader markets over the last decade, falling over 25% since April 2014. Even after adjusting for dividend reinvestments, cumulative returns in this period are just over 4.5% - much lower than the S&P 500 Index ($SPX), which has returned 221% in dividend-adjusted gains over the same period.
Steel prices have been volatile in recent years due to tepid demand from China, a key driver of the commodity. In fact, the steel industry is heavily reliant on China, the world’s second-largest economy, to fuel demand on the back of big-ticket construction projects.
Gerdau’s steel shipments in Q4 of 2022 totaled 2.7 million tonnes, while this number grew to 11.3 million tonnes in 2023. Its adjusted EBITDA stood at $2.6 billion, while free cash flow was $1.34 billion in 2023. Gerdau ended 2023 with a net debt to adjusted EBITDA multiple of 0.40x, which is quite low.
In Q4, Gerdau reported a free cash flow of $250 million and paid shareholders dividends totaling $33.38 million, indicating a payout ratio of less than 15%. A low payout ratio allows Gerdau to reinvest in growth and lower balance sheet debt. The company allocated more than $1 billion towards capital expenditures in 2023, and aims to increase the figure to $1.14 billion in 2024.
The decline in share prices has raised Gerdau’s dividend yield to 7.1%, given an annualized dividend payout of $0.25 per share.
What Is the Target Price for Gerdau Stock?
The consensus rating on GGB is a “moderate buy,” with a mean target price of $5.70 - indicating an upside potential of over 57% from current levels.
Recently, analysts at JPMorgan (JPM) and Goldman Sachs (GS) have raised their ratings on Gerdau stock.
Earlier this month, JPMorgan upgraded Gerdau to “overweight” from “neutral,” with a target price of $6. The investment bank expects 2024 to be an inflection point for Gerdau. According to JPMorgan, Gerdau’s North America region should drive profitability due to strong demand.
Likewise, Goldman Sachs upgraded the steel stock to “buy” from “neutral,” with a target price of $5 due to its appealing valuation. Currently, Gerdau stock trades around $3.61 per share.
Based on the forward price-to-earnings multiple of 6.4x, GGB is quite cheap, given earnings are forecast to improve from $0.56 per share in 2024 to $0.62 per share in 2025.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
