Companhia Siderúrgica Nacional Is a Risky Investment

Brazilian steelmaker Companhia Siderúrgica Nacional (SID) has felt the impact of oversupply in the Brazilian steel industry and a recession in Brazil as its stock is down over 36% in 2015. The weakness in the end markets also reflects in CSN’s latest quarterly results, as its revenue was down 9% year-over-year.

In addition, the steelmaker had also posted a net loss of R$615 million as compared to net income of R$392 million during the first quarter of 2015. But, CSN is also seeing growth in some of its end markets, but will the company be able to make a comeback? Let’s check.

A look at the end market

During the second quarter of 2015, the U.S. economy grew 2.3% annually, depicting 2.9% growth in the personal consumer spending.
Unemployment is falling continuously from 5.6% at the previous year’s end to 5.3% during June 2015, the minimum level in the last seven years. However, weaker economic conditions in the U.S., which is recovering slowly, is believed to continue to impact the demand for steel and other key industrial commodities and thus continue to hurt the margins of Companhia.

In addition, the foreign markets have contributed greatly to CSN’s overall sales volumes since the last three consecutive quarters. Also, Companhia is focused on optimizing its cost structure by pushing on strategic investments to enhance segment’s cost advantages. This low-cost position ensures competitiveness for exports and maintains the company’s leading quartile cost position.

However, the company is delivering a superior mining performance with significant mining costs competitiveness being illustrated by the company during the second quarter of 2015. The successful change in operating business model at Namisa delivered over 14% expansion in production volume for the quarter over the prior quarter. Importantly, improved volume and reduced costs delivered a 46% expansion in the EBITDA for the second quarter of 2015. The steel mining major also demonstrated a slight improvement in cash margin for the quarter despite the reduction of iron ore prices for the period.

All in all, Companhia is managing to sustain the continuing weaker global commodity pricing scenario by successfully enhancing its iron ore and steel productions for the quarter while optimizing the core mining costs.

Weak projections and sentiment

Wall Street Journal’s analysts forecast a weak earnings performance from Companhia for the approaching third and fourth quarters of 2015. The analysts actually believe that the earnings per share for the company during the quarters could further decline below the first quarter of 2015 earnings per share level mainly due to a weaker recovery in the global demand for the key commodities and the depressed prices which is estimated to continue in the near future as well.

In addition, the consensus estimate among 17 investment analysts that evaluate Companhia Siderurgica Nacional suggests that the company will underperform the market. This consensus rating has been maintained since the analysts’ sentiments fell on Nov. 13, 2014. The earlier consensus estimate suggested investors to hold their position in the company.

Conclusion

In my opinion, investors are advised to stay away from Companhia Siderurgica Nacional despite the operating efficiencies being achieved by the company due to weak end market conditions. Moreover, Companhia is debt-burdened as it has a debt of $10.44 billion as against a weaker total cash position of $2.04 billion only. Thus, investors can expect more downside from CSN.
Published on Sep 23, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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