For the second quarter of 2019, investors may want to consider increasing their exposure to ArcelorMittal SA (MT, Financial).
I suggest buying shares of the Luxemburg-based steel manufacturer for four main reasons.
First, negotiations between the U.S. and China are slowly progressing toward an agreement, which will finally put an end to the trade war, positively impacting the prices of base materials and their producers.
Second, though it is moving at a slower pace due to a sluggish Chinese economy, the ongoing global economic expansion will support the basic materials sector, which usually flourishes when the end of the cycle is far away. In fact, though slightly lower compared to the estimates in January 2019 and October 2018, the International Monetary Fund's new estimates suggest global gross domestic product will grow 3.3% in 2019 and 3.6% in 2020.
In addition, the U.S. Bureau of Labor Statistics reported on April 5 that total nonfarm payroll employment increased by 196,000 in March and the unemployment rate was unchanged at 3.8%. Further, the U.S. inflation rate of 1.5% in February was the lowest since 2016.
Third, analysts forecast the steel producer's earnings will significantly grow over the next five years at an average annual rate of 9.73%. Analysts have issued an overweight recommendation rating for shares of ArcelorMittal, meaning the stock is expected to outperform the industry over the next 52 weeks. The price target is $30.86, a 40.3% increase from the closing price of $22 on Tuesday.
ArcelorMittal also pays its shareholders an annual dividend. If the board of directors' dividend hike is approved at the annual meeting in May, it will distribute 20 cents per common share, reflecting a 135.3% jump from the 2018 payment of 8.5 cents. The stock has a forward dividend yield of 0.92% as of April 9.
The world’s leading integrated steel and mining company will also reward shareholders by repurchasing part of its own common stock, investing about $113.4 million.
Finally, the stock is cheap. According to the chart, shares are trading below the 200-day simple moving average line and on par with the 100 and 50-day lines. Though still 12.8% above the 52-week low of $19.50, the share price at close on Tuesday was 66% below the 52-week high of $36.52.
The price-book ratio of 0.55 is well below the industry median of 1.62. The enterprise value to earnings before interest, taxes, depreciation and amortization ratio of 3.59 also underperforms the industry median of 8.71.
The Peter Lynch chart indicates ArcelorMittal is trading cheaply.
The stock has a market capitalization of $22.54 billion.
ArcelorMittal closed 2018 reporting a 23% year-over-year increase in operating income to $6.5 billion, 22% growth in EBITDA to $10.3 billion, an EBITDA margin of 13.5% and a 12.7% increase in net income to $5.1 billion.
The company produces steel products from its facilities located in the Americas, Europe, Asia and Africa. In 2018, ArcelorMittal produced 92.5 million tons of crude steel, which decreased 0.6% from 2017.Â
Thanks to a geographically diversified portfolio of assets, the company is also a large producer of iron ore and metallurgical coal.
While steel shipments declined 1.6% to 83.9 million tons, iron ore shipments increased 0.7% to 58.3 million tons.
The near-term catalyst for the stock is the expected 3.5% to 4.5% growth in Brazilian demand for steel. Meanwhile, the European and U.S. markets are projected to support ArcelorMittal's 2019 production with a lower growth pace ranging between 0.5 and 1.5%.
The balance sheet shows $2.2 billion in cash on hand and securities and $12.5 billion in total debt. The interest coverage ratio of 0.31 indicates the company may have trouble paying the interest expenses on the outstanding debt.
Regardless, the total debt to equity ratio of 41.60% is significantly below the industry median of 58.34%.
Disclosure: I have no positions in any securities mentioned.
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