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| No of shares | 1.6 billion |
| EV | $56.9 billion |
Before we get into the discussion, let us look at the valuation of MT.
One of the best way to see if an investment is a “value investment” is the tangible book value. Tangible book value is asset-liabilities-goodwill-intangible assets. It gives us a measure of the assets on the book which the equity holders can lay their claim on if the company files for bankruptcy. As the annual results were out Feb 7, 2012, I will like to dig a bit deeper into the new figures
| Balance sheet (in $ million) | Dec 31, 2011 | Sep 30, 2011 |
| Cash | 3,905 | 2,800 |
| Total Current Assets | 35,605 | 38,637 |
| Goodwill and intangible assets | 14,053 | 14,683 |
| Total Assets | 121,880 | 127,328 |
| Total Current Liabilities | 23,824 | 25,925 |
| Long-term debt, net of current portion | 23,634 | 24,061 |
| Total Liabilities | 61,403 | 63,952 |
| Non–controlling interests | 3,787 | 3,790 |
| Total equity | 60,477 | 63,376 |
To be safe, let us also deduct the minority interest. The tangible book value of the company is $(60.4-3.8-14)=$42.2 billion. With the today’s price (Feb 12, 2012) of the ADR at $22.2 the company is selling for $34.39 billion. We have a 22% upside on a pure value basis.
Current risks the market expects
The price of MT has gone down to $14.77 in the last 3 months. The current price is now almost 50% above the 52wk low. Although I do not want you to buy the stock at the current price but I will like to discuss some of the risks the market expects and try to answer them, if I can. The thinking here is to keep MT on the watch list and buy on dips when it drops to $19 range.So, why did the stock drop to its 52wk low? Here are some of the fears I expect are dragging the stock down.
- Increased input costs (iron ore, coal)
- Weakened pricing power and shrinking margins due to increased production and competition from other steel manufacturers
- Weakened demand due to defense cuts and a possible recession
- European default
- The level of debt
- Labor unions organizing strikes due to layoffs and factory closing
These are significant dangers indeed. And I would try to dispel some of them, partially if not completely.
1 Tackling increased input costs
The management is clearly on the case. The best way to cut unnecessary costs and manage the risk of nasty commodity price fluctuations is to own the mines that produce the two most needed raw materials; iron ore and coal. If we look at the fourth quarter 2011 results we see that MT is adding new mines and adding to its raw material productions at a fabulous rate. I also like the fact that they have mining developments far and wide (South America, North America, Africa, Australia). As MT produces steel around the globe and has no other peers in the steel industry in terms of the global footprint, the distribution of mining operations will further reduce transportation costs and will help MT increase its margins.
2&3 Pricing pressure due to competition, loss of demand and possible recession
There is a significant risk of lower demand in China. I quote a recent seekingalpha article for this risk. Here is the link for your perusal
China answers for 46% of the world's crude steel production. That is more than the European Union, plus the U.S., plus C.I.S. (former U.R.S.S.) plus Japan all put together (source: World Steel Association). China's production is also 5.8 times higher than in the U.S.
This is a grave danger indeed. But China produces 44% of the steel supply, so it only imports the leftover 2%. Furthermore, if at all anyone is going to survive this crisis, I think MT is the one. ArcelorMittal’s geographical diversification greatly reduces its revenue risk. MT produces over 90 million metric tons of steel (figure: Dec 31, 2011) and has revenue and operations in more than 20 countries spanned over 4 continents. Steel sales in America and Europe, each contribute to one-third of its revenue. In comparison, it sales revenue from countries in Asia, Africa and Commonwealth of Independent States (AACIS division) for 2011 is $10.7 billion up 10% from $9.7 billion in 2010. This is only 11.3% of the total $94 billion sales in 2011. In the years to come, I believe that MT’s AACIS division will be significant growth driver. Particularly in India MT has already started its initial phases to construct plants in Jharkhand and Karnataka.
ArcelorMittal (MT) may beat South Korea’s Posco to become the first overseas steelmaker to build a plant in India, with Karnataka state authorities set to hand over land for the $6.3 billion project in the next six months.
Also interesting are its ongoing projects in China.
4 & 5 European default
This very likely will put the world economy in a tail-spin and beginning of another recession. To survive the recession we have to dig deeper and look at the balance sheet of some of the competitors of ArcelorMittal.| Ticker | Debt/Equity |
| MT | 40% |
| NUE | 53% |
| PKX | 39% |
| X | 87% |
| TX | 24% |
| GGB | 67% |
Although not the best, MT’s debt/equity is in line with its competitors. Furthermore, the large tangible book value is definite plus. MT also owns several assets at different locations in the world and hence will be in a better position to survive the crisis than most others.
6 Labor discontent
ArcelorMittal has already closed two blast furances in Belgium (link to reuters article). It has shut down 9 of its 25 blast furnaces. The company understands (and has stated) that in this uncertain times and a global recession looming, the company cannot afford producing steel as a money loosing proposition. Although unfortunate for the workers, this is a right decision as to keep running the furnaces to produce steel will drag down the margins and decrease profitability.Bottom line
ArcelorMittal pays a dividend of $0.75/share and has announced to maintain it for the year 2011. This is a 3.4% yield on the current price. With the full year EPS of $1.19, this is a 63% yield. In the last five year the dividend has grown at the rate of 8.5% and I think the management will be able to grow earnings and raise dividends. This provides a nice return until the market realizes the true value of ArcelorMittal.About the author:
I started investing in December 2009and my first stock CreditSuisse (CS) tanked to almost half its
value. This nudged me to start learning about investing from the ground
up. I am a long term value investor and am planning to generate sustainable amount of money from investment income by the time I am 40 years old i.e., 2025.
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My lesson from this is as follows:
For maximum benefit, this stock and other base and mining stocks should only be bought in the depth of a recession and sold when the economy is booming. In the current "luke warm" economic conditions its better to stay with defensive names such as in pharma, utilities, telecom etc.
The chinese consumption is a bit scary. Once the chinese build out slows - there will be massive over capacity in the industry. Similar to what the shipping industry is going through. Just take a look at the baltic dry index - which is a combination of a slow economy and massive overcapacity.
http://www.bloomberg.com/quote/BDIY:IND/chart/