Earnings Scorecard: SID - Analyst Blog

Companhia Siderurgica Nacional (SID) or CSN reported encouraging results for the second quarter of 2010 with robust increases registered in its net income and revenue. Despite positive results and improving global steel market, near-term outlook for the company is dimmed by expectation of lower domestic steel shipments, higher manufacturing costs and rising debt levels.  

Earnings Review

On August 10, Companhia Siderurgica Nacional announced its financial results for the second quarter 2010. Net income surged 167% year over year and 85% sequentially to R$894 million (US$496.7 million), or R$0.59 per share (US$0.33 per ADR). Earnings per ADR were in line with the Zacks Consensus Estimate of $0.33 per ADR.
 
The sequential rise was attributable to higher volumes combined with higher prices for iron ore and steel products and lower interest expense, which more than offset increases in income tax and social contribution expenses in the quarter.

Considering the top line, net revenue of R$3,872.6 million (US$2,151.4 million, below the Zacks Consensus Estimate of US$2,184 million) climbed 55% year over year from R$2,491.7 million (US$1,192.2 million) in the year-ago quarter. The growth was due to higher prices and volumes sold.
 
Crude steel production in the quarter soared 38% year over year to 1.2 million tons versus 0.9 million tons in the year-ago quarter. Steel sales volume improved to 1.3 million tons, registering an increase of 37% year over year. Of the total steel volume sold, 88.5% accounted for domestic sales and the rest, international sales. Price for steel products per unit went up 6% year over year.

During the quarter, manufacturing costs increased 18.9% year over year to R$1,784.8 million (US$991.6 million). Loans, financing and debentures, net of current portion were R$16,472.4 million (US$9,151.3 million), up 12.2% from R$14,684.5 million (US$8,158.1 million) in the previous quarter.

Detailed discussion on the earnings release can be found here: CSN’s Profit Soars, Equals Estimate

Agreement of Analysts

Out of the 5 analysts providing estimates for 2010, one analyst revised his EPS forecast positively in the last 7 days. While out of 4 analysts, one analyst cut down his estimate for 2011.

Magnitude of Estimate Revisions

In the last 7 days, EPS estimate for 2010 was stable at $1.26 and for 2011 went down from $1.91 to $1.89. The current Zacks estimate represents a year-over-year decline of 32.98% for 2010 and a growth of 50.00% for 2011.

Underperform Recommendation

We believe the growth outlook of Companhia Siderurgica is encouraging due to various projects being carried out by the company. Moreover, its entrance into the cement business would be an expected synergy. According to the World Steel Association, global steel demand is likely to increase by 10.7% in 2010 and 5.3% in 2011. This spur in demand is based on economic recovery, increasing private and public capital spending, falling unemployment levels and growth of the emerging economies, especially China.

However, the quarters ahead may turn out to be depressed attributable to falling domestic sales and higher manufacturing costs. High inventory levels in the supply chain will force steelmakers to export more, leading to lower domestic sales (88.5% of sales). Also, providing funds for the company’s dividend payments and investment plans account for CSN’s escalating debt levels. Moreover, high cyclicality and growing competition in the industry are major hindrances to growth.

Considering these factors and anticipating a lack of any positive share price driver, we rate the ADR Underperform.