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Arcelor Mittal: The Time Has Come
Posted by: fedezaldua (IP Logged)
Date: November 7, 2013 10:39AM

Arcelor Mittal (MT)'s results were better than expected. The company, which accounts for 6% of global steel output, announced a loss of $193 million, which compares favorably with a net loss of $652 million a year earlier. In addition, Mittal's EBITDA was up by 24% year over year beating consensus estimates by 10%. According to Lakshmi Mittal, the company's chairman and CEO, "The bottom of the cycle is behind us and we expect second-half EBITDA, usually comparably weaker, to be at least equal to the first (half)."

Let's take a look at Mittal's prospects and see if it would make sense to make a bet on the company's shares.

The Future of Mittal's Stock

It's tough not to agree with Mittal's words. Steel-specific indicators suggest that earnings are likely to improve on this fourth quarter through at least early 2014. As a matter of fact, I estimate that EBITDA could improve as much as 38% year over year from 2013 to 2014 (up to $9 billion).

Besides the clear EBITDA recovery in the third quarter engendered by better steel prices, cost-cutting measures and higher shipments, Arcelor Mittal has taken many steps to find a way ahead of the crisis. For example, the company has idled production capacity in Europe (49% of the company's sales) and sold billions of dollars in assets to lower its huge debt pile (now at 2.6 times EBITDA).

On top of what was just mentioned above, a number of facts will play in favor of Arcelor Mittal's stock price going forward. Three particular forces might trigger a rally in the shares: (1) weak investor sentiment towards the space: Most portfolios are well under-invested in steel, (2) No more downgrades by analysts: As the cycle turns positive, market analysts will start up-grading stocks the way Goldman Sachs just up-graded AK Steel (AKS) and US Steel (X) (3) Arcelor Mittal's valuation is close to historic trough levels.


The third point in the paragraph above was valuation. Arcelor Mittal now trades at 5 times 2014 enterprise value to EBITDA and 48% its book value. Even when the company will not produce earnings until 2015, I believe its time to start considering the stock. Other big steel companies such as Nucor (NUE) which is the most solid steel company in the world and is held by David Dreman sell for 2014 9.3 times enterprise value to EBITDA and 230% its book value. Smaller but weaker competitors such as U.S. Steel also sell for higher multiples. The integrated steel producer of flat rolled and tubular products trades at 8.1 times 2014 enterprise value to EBITDA and 215% its book value.

Bottom Line

Given the overall market momentum, the rising sentiment towards steel (from a historically low level) and Arcelor Mittal's market valuation, I believe the company's shareholders should stay long the shares. Even when the company is over-indebted and its huge European operations are still very weak, I believe that you should go long steel when the cycle is just starting.

Stocks Discussed: MT, NUE, AKS, X,
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