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Summary

  • Steel is the major revenue driver of the company. The growth in steel shipments culminated into net revenue growth of 1% during the most recent half.
  • The company had reported an improvement in its EBIDTA/ ton which increased to $83 in the first half of 2014, depicting an increase of $4 per ton.
  • ArcelorMittal is on the right track to achieving its targeted reduction of 7% in iron ore per unit cost in the current fiscal year.
  • Demand for steel is expected to remain strong in the main operating markets i.e. US (5-6%) and Europe (3-4%) followed by Middle East and Africa.
  • The stock represents an upside potential of 59% to the current market price.

ArcelorMittal (NYSE:MT), the world's leading integrated steel and mining company, was majorly affected by the global macroeconomic conditions that followed the financial contagion of 2008. In an attempt to make up for the loss, the company emphasized its efforts in expanding its footprint in new demand markets, curtailing operational costs and restructuring its operations to outclass its peers.

While the sales of steel produced is made to developing as well as developed countries, steel making operations are mainly concentrated in three areas: namely, America (38%), Europe (46%) and other countries (16%) that include Kazakhstan, South Africa and Ukraine. Moreover, the company has a noteworthy and growing portfolio of raw material and mining assets along with strategic long term contracts with external suppliers.

ArcelorMittal had substantial sales in Europe and thus was heavily affected by the macroeconomic conditions in the region during the years 2011 to 2013. During this time, the eurozone sovereign debt crisis has strangled all of Europe and the consequent austerity measures taken along with other factors finally resulted in the downturn or stagnation in many of the countries in the eurozone.

Let's take a look at how the company's efforts have helped in improving its performing and its future growth prospects.

Recent Performance At A Glance

Top Line Growth

(click to enlarge)

Source: Half Year Report 2014

Steel is the major revenue driver of the company. The growth in steel shipments culminated into net revenue growth of 1% during the most recent half. Although the shipment of steel had gone up by 2% in the first half of fiscal year 2014, the decline in average selling price played its role in partially offsetting the positive effect. Growth in the steel shipments was primarily brought in by the ACIS region on the back of higher shipments in Kazakhstan along with stable operations. Similarly, ACIS was also the main region that put a strain on the average selling price of steel mainly due to a decline in the international prices led by lower raw material prices, and to some extent due to currency devaluation.

Coal production was down by 10% during the first half of 2014 compared to the same period last year based on the difficult geological conditions that hindered the mining operations in the Russian and US region.

Bottom Line Effect

Source: Press Release

In spite of the negative price movement for iron ore and the ongoing operational problems, the company had reported an improvement in its EBIDTA/ ton which increased to $83 in the first half of the fiscal year 2014, depicting an increase of $4 per ton from the corresponding period last year. The main contributor to this improvement was the steel segment whose EBITDA went up by $7 per ton in comparison to the previous year. Apart from Brazil where margins continued to shrink, steel divisions in other regions have showed progress. Additionally, the company is on the right track to achieving its targeted reduction of 7% in iron ore per unit cost in the current fiscal year on the back of its cost optimization program and expansion of its iron ore capacity.

Future Outlook

The demand for steel is expected to remain strong in the upcoming quarters in the main operating markets of ArcelorMittal i.e. US (5-6%) and Europe (3-4%) on the back of positive growth momentum in the automobile and appliances sector. Demand is also expected to flow in from Middle East and Africa which will utilize the excess production of steel in Ukraine where the recent turmoil has dampened demand. However, demand in China is expected to slow down.

According to Jeff Largey, a steel analyst at Macquarie Securities in London, "We are seeing real progress in a turnaround on the steelmaking side of the business".

On the contrary, the expected plunge in the price of iron ore from $120 per metric ton to $104.4 may dent the revenue collection from its mining segment. However, mining represented only 6.5% of the revenue base in the most recent half.

Final Verdict

Based on the positive demand outlook for steel in the core operating markets and achievement of its cost reduction targets, I believe the company will be able to further elevate its EBITDA per ton. The company's future performance potential can also be confirmed from its valuation. Based on the sector's P/E "ttm" of 39.07x and consensus analyst EPS estimate of $0.57 for 2014, the stock's intrinsic value is calculated to be $22.27 which represents an upside potential of 59% to the current market price.

Source: ArcelorMittal: Recovering From Its Depressing State