Itau BBA upgrades Gerdau stock rating on valuation By Investing.com

Itau BBA upgraded Gerdau to Outperform and kept a $4.60 target vs the current $3.61 share price (implying ~27% upside) and maintained a year-end 2026 target of BRL 24. Recent Q4 2025 results showed a large EPS miss at -$0.1281 vs $0.0761 forecast (-268.33% surprise) while revenue beat at $3.29B vs $3.07B (+7.17%); the bank expects Q1-2026 EBITDA of BRL 2,820m (+19% QoQ). Valuation/returns cited as supportive: 2026e EV/EBITDA ~3.9x, average 2026–28 free cash flow yield ~9%, dividend yield 1.63% with 35 years of payouts and active buybacks.

Analysis

Gerdau’s recent price action and capital-return program create a classic EM value-with-leverage setup: shrinking free float from buybacks amplifies any operational inflection, so a modest improvement in domestic construction or scrap spreads can produce outsized EPS upside without materially better steel prices globally. Second-order winners include local rebar fabricators (whose margin squeeze eases if domestic mill capacity tightens) and scrap resellers (higher volumes/prices), while integrated miners and iron-ore exposed names are less leveraged to a Brazilian infrastructure rebound and could lag.

Key near-term catalysts live on operability and FX: quarterly results and working-capital movements will move the stock within days-to-weeks, while policy-driven infrastructure spend and energy/coal cost normalization play out over 3–12 months. Tail risks include a sharp BRL depreciation, a Chinese export surge that depresses global spreads, or a regulatory shock to energy prices—any of which can flip the story quickly and remove the valuation cushion.

Consensus appears to underprice the convexity created by buybacks plus steady FCF generation but overweights recent EPS volatility as evidence of structural weakness. That creates a tradeable asymmetry: a hedged long can capture the re-rating if domestic demand and spreads normalize, while downside can be meaningfully curtailed with simple options protection. Monitor scrap spreads, Brazilian real, announced buyback cadence, and quarter-to-quarter working capital changes as primary signal set.

Key Decisions for Investors

• Long GGB equity with options hedge: Buy GGB (NYSE:GGB) size 1–2% NAV, horizon 9–15 months; simultaneously buy Jan 2027 $3.00 puts to cap downside. Target: capture re-rating from domestic demand and share scarcity; risk = cost of puts + potential 10–15% stock move if macro worsens.
• Defined-risk bullish call spread: Buy GGB Jan 2027 $3.50–$5.00 call spread (or nearest available) as a lower-capital way to express a 6–12 month rebound. Max loss = premium; skewed payoff to 20–35% upside with limited capital at risk.
• Relative-value pair: Long GGB / Short MT (ArcelorMittal, NYSE:MT) equal notional for 6–12 months to isolate Brazilian domestic upside vs global steel cyclicality. Target relative outperformance 15–25%; stop-loss if global HRC spreads widen >150bps or BRL moves unfavorably >10% in 30 days.
• Event-driven tactical short (conditional): If upcoming quarter shows another EPS miss driven by widening spreads or a surprise buyback pause, initiate a short via borrow or buy-to-open puts on GGB for a tactical 1–3 month trade. Risk: strong operational beat or buyback acceleration could gap the stock higher—size accordingly.