ArcelorMittal (MT, Financial) has recently delivered strong operating results despite weaker demand and low iron ore prices. The strong growth in its steel shipment drove its top line performance by 2.2% on a year over year basis. In addition, the company looks solid on its steel department that should probably assist the company to offset the weak iron ore prices going forward.
The way ahead
Nevertheless, it is a positive sign for ArcelorMittal that looks quite upbeat to capitalize this significant growth movement. It continues to see strength in its steel demand in most of the countries. It is expanding its footprint in its core steel markets such as U.S, Brazil, NAFTA, ACIS and Europe. The steel consuming sectors like automotive, non-residential construction, appliance, machinery, equipment, transportation and infrastructure are driving growth for steel in these regions. The auto sector had positive growth of 11% this year so far, while machinery construction transportation and infrastructures have stabilized. The automotive and plane industries remain two promising customers for the company going forward.
In the United States, the company has raised its growth estimates more than 8% for fiscal 2014. The recent month PMI reflects better growth in manufacturing output in the United States. It is seeing the steel demand stabilized in Brazil as well. The steel demand in Brazil was impacted by number of factors such as uncertain election, late World Cup, structural problems and held back investments. However, these conditions have calmed down and the construction segment particularly is driving steel growth in the region.
Improvements worth watching
It has observed signs of improvement in the Europe, ACIS and NAFTA regions. It is encouraged with the improved performance in Europe. It is seeing strong demand for steel in the region particularly its steel order book looks pretty healthy. Also, its flat products in Europe are running between 5% and 10% above year ago level, which is positive signs for the company. In addition, its ACIS business segments have displayed signs of turnaround that should enhance its results going forward. The NAFTA regions will now get benefit of recent startup of the blast 3 furnace No. 3 at Tubarao.
Furthermore, the company looks solid on its key strategic priorities. Its first and foremost priority is to capture more shares on the recent rebound in steel segment from its core markets. And to do that it is increasing its shipment. Its shipment increased 3.9% more as compared to last year. The European segment shipment rose by 6% compared to 2013.
Its second priority is to concentrate on gaining back its margins to a normalized level. It is increasing its operating margins through higher shipments and cutting down costs with its footprint adjustment in Europe. Also, it is controlling its variable costs with its management gain program, which is enhancing its operational performance. Its ACIS business driven by these initiatives grew $6 per ton higher than 2013 despite lower iron ore prices. Moves such as these should assist the company to restore its margin and drive its results going forward.
The third priority focuses on developing core franchise business. Its franchise business, particularly automotive, looks quite appealing going forward. Also, it has recently launched a new product called Fortiform. This new range of cold-formable advanced high-strength steel product along with hot-formable Usibor products should complement its existing product portfolio and drive growth for its automotive segment.
ArcelorMittal is additionally expanding its iron ore production base, which is its fourth priority this year. Enlarging iron ore production base should deliver higher volume and lower in the future. This was well reflected in its recent results, where its volume rose by 6% year-over-year basis and its costs decreased by approximately 13%.
Last but not the least, the company remains on track to lower down its net debt. Its Management Gain Program focuses on lowering costs. With the help of the program, the company has been able to bring down its net debt to $15 billion in the medium term whereas the debt amount stood at $17.4 billion towards the end of the second quarter of 2014.
Final words and valuation
ArcelorMittal looks pretty good due to a rebound in steel demand. The analysts expect its earnings to grow at CAGR of 75.10%, which is quite higher than average industry CAGR of 17.07% for the next five years. This highlights tremendous growth for the stock in the future. Also, its short term gains are pretty attractive. Its earnings are expected to grow 121.20% this year and 196.80% by next year respectively.
Moreover, the stock shares cheap valuation. It has forward P/E multiple of 11.99 and PEG ratio of 0.48 for the next five years that continues to support its growth in the long-run. Its balance sheet carries total cash of $4.18 billion and total debt of $21.87 billion. ArcelorMittal has operating cash flow of $4.26 billion and levered free cash flow of $2.59 billion.
