ArcelorMittal (MT) and Mosaic Co (MOS), both with lower Forward P/E and dividend distribution, are two basic materials stocks recovering from the recent slump and had received positive upgrades from analysts recently. Both stocks will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
MT was up 1.15% and closed at $14.89 on March 11, 2013. MT had been trading in the range of $13.28-$21.61 in the past 52 weeks. MT has a market cap of $23.07B with a high beta of 2.15.
According to the report from Zacks on March 8, 2013, MT remains affected by the challenging economic conditions in Europe. It is also exposed to volatility in steel pricing and tough competition and has significant debt. The effect of price declines was witnessed across all segments in the fourth quarter and led to a contraction in the top line. MT still retains a strong sell rating with Zacks.
However, on March 11, 2013, UBS upgraded MT from neutral to buy. Analysts said if the company reached its debt target by the end of 2013, it might regain investment grade status. Asset optimization in Europe could also benefit the stock. Analysts currently have a mean target price of $20.44 and a median target price of $18.91 for MT. Analysts, on average, are estimating an EPS of -$0.06 for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $0.65 with revenue of $86.14B, which is 2.30% more than 2012.
There are a few positive factors for MT:
- MT is well-positioned relative to other European steelmakers with its vertical integration and a high degree of operating leverage, as reported by Morningstar
- Higher revenue growth (3 year average) of 1.3 (vs. the industry average of -5.1)
- Lower debt/equity of 0.4 (vs. the industry average of 0.5)
- Lower P/B and P/S of 0.4 and 0.3 (vs. the industry averages of 0.9 and 0.5)
- Lower Forward P/E of 7.8 (vs. the S&P 500's average of 13.9)
- MT is currently trading below its book value of $33.39 per share
- MT generates an operating cash flow of $5.29B with a levered free cash flow of $3.67B
- MT currently offers an annual dividend yield of 5.04%
Technically, the MACD (12, 26, 9) indicator had turned to show a bullish sign in the last trading day. The momentum indicator, RSI (14), is picking up but still indicating a slightly bearish lean at 40.63. MT is currently trading below its 50-day MA of $16.51 but is approaching its 200-day MA of $15.44, as seen from the chart below.
How to Invest
Although MT is still exposed to volatility in steel pricing, there are still lots of upside potential based on current valuation (Forward P/E of 7.8 and trading below its book value of $33.39). MT is also better positioned than other European competitors. For bullish investors, a credit put option spread of June 22, 2013 $11/$13 put can be reviewed. Investors can also review the following ETF to gain exposure to MT:
Market Vectors Steel Index ETF Fund (SLX), 7.39% weighting
The Mosaic Company
MOS was up 2.13% and closed at $61.50 on March 12, 2013. MOS had been trading in the range of $44.43-$63.46 in the past 52 weeks. MOS has a market cap of $26.18B with a beta of 1.39.
On March 11, 2013, Scotia Capital upgraded MOS from sector perform to outperform. On March 8, 2013, analysts at Berenberg see more evidence that potash prices have reached a floor, and there is limited downside risk going further into 2013. Analysts currently have a mean target price of $84.46 and median target price of $85.00 for MOS.
On March 11, Investors Alliance announced new research reports highlighting MOS and several other chemical manufacturing companies. Ethisphere has once again recognized The Mosaic Company as one of the World's Most Ethical Companies. President and CEO Jim Prokpanko said,
This distinction provides proof that our more than 8,000 employees are successfully translating Mosaic's promises into meaningful action globally. Our culture of accountability continues to benefit stakeholders and the communities where we live and work. With this recognition, we're honored and inspired to continue growing our corporate citizenship initiatives - as we work to help the world grow the food it needs.
There are a few positive factors for MOS:
- Mosaic will benefit from growing global demand for agricultural inputs, according to Morningstar's report.
- Lower debt/equity of 0.1 (vs. the industry average of 0.3)
- Lower P/B of 2.0 (vs. the industry average of 3.3)
- Lower Forward P/E of 11.9 (vs. the S&P 500's average of 13.9)
- MOS generates an operating cash flow of $2.30B with a levered free cash flow of $11.88M
- MOS currently offers a dividend yield of 1.63%
Technically, the MACD (12, 26, 9) indicator is showing a bullish sign with increasing MACD difference. RSI (14) is picking up and indicating a strong buying momentum at 62.37. MOS is trading above its 200-day MA of $55.91 and 50-day MA of $59.59. The next resistance is $62.14, the R1 pivot point, followed by $65.67, the R2 pivot point, as seen from the chart below.
How to Invest
With a solid balance sheet, MOS is expected to gain as potash prices stabilized. MOS is technically bullish in the short-term. For bullish investors, a credit put option spread of June 22, 2013 $50/$55 put can be reviewed, which will allow investors to gains some upside credit premium or to acquire MOS stock at a price below $55 upon options expiration. Investors can also review the following ETFs to gain exposure to MOS:
- Global Agriculture Portfolio (PAGG), 7.65% weighting
- Fertilizers/Potash ETF (SOIL), 5.17% weighting
- Dow Jones U.S. Basic Materials Index (IYM), 3.54% weighting
Note: All prices are quoted from the closing of March 11, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.