Brian Yu, CFA
What's New — We initiate coverage of GNA with a 1H rating and $21 target
price based on a positive view of U.S. steel market pricing and margins.
Buy Steel in a Recession? — Conventional wisdom suggests now should be
the time to sell steel stocks. In our view, this would have been true 10 years
ago when the U.S. was the price leader, but this leadership has waned and
the U.S. finds itself in a supply-driven market, pulled by international
strength as necessary imports ebb and service center inventories stand at
multi-year lows.
Desirable Market Mix — As a long-products producer, GNA has little
exposure to consumer markets such as automotive and appliance, and an
estimated 83% of the company’s sales relate to the stronger non-residential
construction and infrastructure markets.
Consolidator — Two-thirds owned by Gerdau S.A., GNA is unlikely to be
acquired in the ongoing steel M&A and should continue to play the role of a
consolidator. Since 2002, the company has grown its annual shipments run
rate to nearly 10 mln tons from 3 mln through a series of acquisitions,
punctuated by the $4.2 bln purchase of Chaparral in 2007.
? Valuation — At 8.8x P/E and 5.9x EV/EBITDA on our ’09 estimates, GNA
trades at a 20% discount to the peer group. As the company deleverages to
under 35% debt/capital from 44% throughout 2008, we expect the valuation
discount to narrow once again.
by Smith Barney, Portfolio Strategist
http://astuk-virtuallystocks.blogspot.com/
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