Gerdau's North America segment strengthens, but Brazil recovery remains unproven

What happened

Gerdau's North American operations reportedly improved EBITDA margin to 27.7%, up from 24.1% in 1Q26, according to a Motley Fool summary of recent results. Free cash flow over the first nine months of 2026 reached BRL 1.7 billion, a sharp turnaround from the BRL 16 million reported in 1Q26. This improvement likely reflects stronger backlog, mix shift toward data centers and renewables, and initial contributions from 2H26 projects at Miguel Burnier and Midlothian. However, the company's Brazil segment remains the key uncertainty, with import penetration still elevated and no confirmed antidumping remedy as of the latest deep-value report. The positive North America momentum reduces near-term downside risk but does not yet validate a re-rating given Brazil's weak 9.2% EBITDA margin in 1Q26.

Implication

Investors should view the North America margin and FCF figures as confirmation of the quality of the U.S. franchise, but remain cautious about extrapolating them into 2027 if backlog normalizes. The BRL 1.7 billion nine-month FCF eliminates a key bear-case trigger (sustained near-zero FCF), but capex remains elevated at R$4.7 billion for the year, so full-year FCF conversion still needs to stay positive. Brazil's unresolved import penetration and the lack of binding trade remedies are the main drag on consolidated returns, and until Brazil EBITDA margin exceeds 10% sustainably, the stock is not cheap on a normalized basis. The current valuation (EV/EBITDA ~7.3x, P/E ~32x on trailing depressed earnings) already prices in much of the North American strength, leaving limited upside without a Brazil catalyst. A disciplined approach would maintain a WAIT rating, trimming exposure if the stock approaches the prior trim level of $5.80 and adding only on a pullback toward $4.40 with evidence of Brazilian margin improvement.

Thesis delta

The prior WAIT thesis emphasized near-zero FCF risk and reliance on North America alone; the new nine-month FCF of BRL 1.7 billion meaningfully reduces that cash-flow concern. However, the core Brazil optionality remains unresolved, and the master report's bull case required Brazil margin above 11% plus trade remedies. Thus, the thesis shifts from 'WAIT with high cash-flow risk' to 'WAIT with reduced downside but unchanged upside catalyst requirements.'