ArcelorMittal May Double In Value, Outperforming U.S. Steel

| About: ArcelorMittal (MT)

In an earlier article here, I argued that ArcelorMittal (NYSE:MT) was significantly undervalued and would outperform US Steel (NYSE:X). Since then, it has soared by 16.5%, more than doubling the return of its competitor. Despite recent progress to return lost value, these steel producers are worth around one half of what they were just 12 months ago. Favorable secular trends in industrial production will help drive high risk-adjusted returns for both firms.

From a multiples perspective, ArcelorMittal and US Steel are trading at depression levels. The former is rated near a "strong buy" and trades at a respective 24.6x and 6.3x past and forward earnings, with a dividend yield of 3.5%. US Steel trades at 7.4x forward earnings, and with a dividend yield of 0.7%. Both companies are 120% more volatile than the broader market, and thus are technically positioned to gain from a macro recovery.

To get a sense of how ArcelorMittal is favored on the Street, consider this:

The stock has a five-star rating (out of five) at Motley Fool CAPS, with 2,045 members out of 2,105 rating the stock outperform, and 60 members rating it underperform. Among 531 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 529 give ArcelorMittal a green thumbs-up, and two give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on ArcelorMittal is outperform, with an average price target of $33.97.

ArcelorMittal had decent fourth quarter EBITDA of $1.7B, but still yielded a miserable loss of $0.65 for EPS versus the the expectations for $0.12 worth of EPS profit. Guidance for the first half of 2012 was equally disappointing, with expectations for EBITDA between $4.1B and $6B, which indicates weakness in y-o-y comps. With that said, concerns about leverage and financial position have proven overblown. Management shaved off 10% of net debt, bringing the figure to $22.5B. Going forward, the company is likely to sell off non-core assets and reduce working capital. This will not only help secure an investment grade rating, but also streamline operations to improving efficiency. At the same time, capacity closures are improving margins, which were 320 bps below average levels following 1Q09 lows.

Consensus estimates for ArcelorMittal's EPS forecast that it will grow by 68.5% to $2.19 in 2012 and then by 56.2% and 27.8% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $3.34, the stock may nearly double.

US Steel is similarly attractive despite what the "hold" rating on the Street suggests. Management has done a stellar job mitigating risk and has limited exposure to coking coal to protect margins. The company also has done well to address competitive pressures by optimizing facilities and increasing diversification in the auto, electrical, and oil & gas sectors. Self-sufficiency in iron ore and vertical integration also enables US Steel to maximize free cash flow from global pricing improvements.

Consensus estimates for US Steel's EPS forecast that it will turn positive at $2.78 in 2012 and then grow by 38.1% and 19.1% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $3.79, the stock may soar to $45.48.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.