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"When I die, I want to die like my grandfather who died peacefully in his sleep. Not screaming like all the passengers in his car."

Will Rogers

ArcelorMittal operates as an integrated steel and mining company. It is the largest steel producing company in the world and is the leader in steel for use in automotive, construction, packaging and household appliances.

ArcelorMittal produced 91.9 million tonnes of crude steel, which amounts to approximately 6% of the world's steel output. Its steelmaking operations are highly diversified on a geographic basis. Around 36% of its steel is produced in the Americas, over 52% is produced in Europe and the remainder is produced in other countries such as Kazakhstan, South Africa and Ukraine.

Even though ArcelorMittal is our play of choice, it comes with a caveat. Only individuals willing to take on some risk should consider this play or at least consider the strategy suggested below. Investors looking for a play that carries less of a risk should consider Agrium Inc (AGU) or Albemarle (NYSE:ALB), both of which are covered in this article.

Reasons to be bullish on ArcelorMittal:

It has a massive levered free cash flow of $4.23 billion.

A good five dividend growth rate of 12.59%.

A five-year cash flow average of 9.31.

Net income surged from $75 million in 2009 to a stunning $2.25 billion in 2011.

EBITDA increased from $1.02 billion in 2009 to $9.2 billion in 2011.

Cash flow per share increased from $4.88 in 2009 to $5.04 in 2011.

Sales increased from $6.5 billion in 2009 to $9.39 billion in 2011.

It has a good long-term debt to equity ratio of 0.42.

A high beta of 2.65 which makes it a good candidate for covered writes. Selling covered calls open up a second stream of income. If one is bullish on the stock, then the high beta is also good for selling naked puts.

It has a decent yield of 3.8, which is well above the official inflation rate.

A great payout ratio of 38%.

A five average payout ratio of only 25%.

It has an estimated 3-5 year EPS projected growth rate of 21%.

An acceptable quick and current ratio of 1.50 and 1.39 respectively.

$100K invested for 10 years would have grown to $1.05 million.

Possible strategy for ArcelorMittal:

We would wait for a test of the $15 ranges and then sell naked puts with roughly six months of time before expiration at strikes ranging from $13-$14. If the stock trades below the strike, you will be assigned the shares but your entry price will be even lower as you were paid a premium when you sold the puts. For example, if you sold the Sept. 14 puts for $1.00, then your final if the shares were assigned to you would work out to $13.

Investors should pay attention to the following risks associated with trusts:

  1. Cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  2. While investing in royalty trusts can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone, the trust is also gone. Investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening a position in the trusts that are discussed in this article.

Many key ratios will be covered in this article and investors would do well to get a handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio is the total long-term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest - 5 Appealing Companies: Baidu Our Top Choice.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditure, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share are $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - 5 Interesting Communications Plays: China Mobile Our top pick.

Company: ArcelorMittal (MT)

Levered Free Cash Flow = $4.32B

Basic Key ratios

  1. Percentage Held by Insiders = 0.06
  2. Relative Strength 52 weeks = 17
  3. Dividend 5-year Growth = -12.59
  4. Cash Flow 5 -year Average = 9.31
  5. Dividend Yield 5-Year Average = 2.45

Growth

  1. Net Income ($mil) 12/2011 = 2259
  2. Net Income ($mil) 12/2010 = 3005
  3. Net Income ($mil) 12/2009 = 75
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = -23.37
  5. Quarterly Net Income this Quarterly/same Quarter year ago = -28.21
  1. EBITDA ($mil) 12/2011 = 9294
  2. EBITDA ($mil) 12/2010 = 7829
  3. EBITDA ($mil) 12/2009 = 1020
  4. Net Income Reported Quarterly ($mil) = -1000
  5. Annual Net Income this Yr/ Net Income last Yr = -24.83
  6. Cash Flow ($/share) 12/2011 = 5.04
  7. Cash Flow ($/share) 12/2010 = 4.64
  8. Cash Flow ($/share) 12/2009 = 4.88
  1. Sales ($mil) 12/2011 = 93973
  2. Sales ($mil) 12/2010 = 78025
  3. Sales ($mil) 12/2009 = 65110
  1. Annual EPS before NRI 12/2009 = 1.5
  2. Annual EPS before NRI 12/2010 = 1.68
  3. Annual EPS before NRI 12/2011 = 1.8

Dividend history

  1. Dividend Yield = 3.80
  2. Dividend Yield 5 Year Average 12/2011 = 2.45
  3. Dividend Yield 5 Year Average 09/2011 = 2.45
  4. Annual Dividend 12/2011 = 0.64
  5. Annual Dividend 12/2010 = 0.64
  6. Forward Yield = 3.79
  7. Dividend 5 year Growth 12/2011 = -12.59

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.36
  2. Payout Ratio 5 Year Average 12/2011 = 0.25
  3. Payout Ratio 5 Year Average 09/2011 = 0.25
  4. Payout Ratio 5 Year Average 06/2011 = 0.24
  5. Change in Payout Ratio = 0.11

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -54.53
  2. Next 3-5 Year Estimate EPS Growth rate = 21.29
  3. EPS Growth Quarterly(1)/Q(-3) = 152.5
  4. ROE 5 Year Average 12/2011 = 11.19
  5. Return on Investment 06/2011 = 3.66
  6. Debt/Total Cap 5 Year Average 12/2011 = 27.51
  1. Current Ratio 06/2011 = 1.5
  2. Current Ratio 5 Year Average = 1.39
  3. Quick Ratio = 0.58
  4. Cash Ratio = 0.31
  5. Interest Coverage Quarterly = 1.90

Valuation

  1. Book Value Quarterly = 38.75
  2. Price/ Book = 0.43
  3. Price/ Cash Flow = 3.34
  4. Price/ Sales = 0.28
  5. EV/EBITDA 12 Mo = 4.95

Company: Agrium Inc

Levered Free Cash Flow = $870 million

Basic Key ratios

  1. Relative Strength 52 weeks = 56
  2. Dividend 5-year Growth = 16.48
  3. Cash Flow 5 -year Average = 6.03
  4. Dividend Yield 5-Year Average = 0.22

Growth

  1. Net Income ($mil) 12/2011 = 1375
  2. Net Income ($mil) 12/2010 = 714
  3. Net Income ($mil) 12/2009 = 366
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 92.02
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 19.62
  1. EBITDA ($mil) 12/2011 = 2491
  2. EBITDA ($mil) 12/2010 = 1437
  3. EBITDA ($mil) 12/2009 = 822
  4. Net Income Reported Quarterly ($mil) = 189
  5. Annual Net Income this Yr/ Net Income last Yr = 92.58
  6. Cash Flow ($/share) 12/2011 = 12.2
  7. Cash Flow ($/share) 12/2010 = 6.95
  8. Cash Flow ($/share) 12/2009 = 4.5
  1. Sales ($mil) 12/2011 = 15470
  2. Sales ($mil) 12/2010 = 10520
  3. Sales ($mil) 12/2009 = 9129
  1. Annual EPS before NRI 12/2007 = 3.59
  2. Annual EPS before NRI 12/2008 = 8.34
  3. Annual EPS before NRI 12/2009 = 2.96
  4. Annual EPS before NRI 12/2010 = 4.82
  5. Annual EPS before NRI 12/2011 = 9.78

Dividend history

  1. Dividend Yield = 0.54
  2. Dividend Yield 5 Year Average 12/2011 = 0.22
  3. Dividend Yield 5 Year Average 09/2011 = 0.22
  4. Annual Dividend 12/2011 = 0.28
  5. Annual Dividend 12/2010 = 0.11
  6. Forward Yield = 0.54
  7. Dividend 5 year Growth 12/2011 = 16.48

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.05
  2. Payout Ratio 5 Year Average 12/2011 = 0.03
  3. Payout Ratio 5 Year Average 09/2011 = 0.03
  4. Payout Ratio 5 Year Average 06/2011 = 0.03
  5. Change in Payout Ratio = 0.02

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -8.64
  2. Next 3-5 Year Estimate EPS Growth rate = 9.03
  3. EPS Growth Quarterly(1)/Q(-3) = 1-138.78
  4. ROE 5 Year Average 12/2011 = 22.05
  5. Return on Investment 06/2011 = 19.07
  6. Debt/Total Cap 5 Year Average 12/2011 = 27.33
  7. Current Ratio 06/2011 = 2.08
  8. Current Ratio 5 Year Average = 1.98
  9. Quick Ratio = 1.22
  10. Cash Ratio = 0.64
  11. Interest Coverage Quarterly = 10.06

Valuation

  1. Book Value Quarterly = 40.73
  2. Price/ Book = 2.07
  3. Price/ Cash Flow = 6.9
  4. Price/ Sales = 0.86
  5. EV/EBITDA 12 Mo = 5.64

Company: Permian Basin Royalty Trust (NYSE:PBT)

Basic Key ratios

  1. Relative Strength 52 weeks = 70
  2. Dividend 5-year Growth = -6.4
  3. Cash Flow 5 -year Average = 1.48
  4. Dividend Yield 5-Year Average = 8.35

Growth

  1. Net Income ($mil) 12/2011 = 63
  2. Net Income ($mil) 12/2010 = 64
  3. Net Income ($mil) 12/2009 = 38
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = -1.1
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 1.39
  1. EBITDA ($mil) 12/2011 = 63
  2. EBITDA ($mil) 12/2010 = 64
  3. EBITDA ($mil) 12/2009 = 38
  4. Net Income Reported Quarterlytr ($mil) = 14
  5. Annual Net Income this Yr/ Net Income last Yr = -1.11
  6. Cash Flow ($/share) 12/2011 = 1.36
  7. Cash Flow ($/share) 12/2010 = 1.37
  8. Cash Flow ($/share) 12/2009 = 0.81
  1. Sales ($mil) 12/2011 = 65
  2. Sales ($mil) 12/2010 = 65
  3. Sales ($mil) 12/2009 = 39
  1. Annual EPS before NRI 12/2007 = 1.45
  2. Annual EPS before NRI 12/2008 = 2.39
  3. Annual EPS before NRI 12/2009 = 0.81
  4. Annual EPS before NRI 12/2010 = 1.38
  5. Annual EPS before NRI 12/2011 = N/A

Dividend history

  1. Dividend Yield = 7.71
  2. Dividend Yield 5 Year Average 12/2011 = 8.35
  3. Dividend Yield 5 Year Average 09/2011 = 8.35
  4. Annual Dividend 12/2011 = 1.36
  5. Annual Dividend 12/2010 = 1.38
  6. Forward Yield = 7.71
  7. Dividend 5 year Growth 12/2011 = -6.4

Dividend sustainability

  1. Payout Ratio = 100
  2. Payout Ratio 5 Year Average 12/2011 = 0.93
  3. Payout Ratio 5 Year Average 09/2011 = 0.93
  4. Payout Ratio 5 Year Average 06/2011 = 0.93

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 0.15
  2. EPS Growth Quarterly(1)/Q(-3) = 108.57
  3. ROE 5 Year Average 12/2011 = 7262.56
  4. ROE 5 Year Average 09/2011 = 7262.56
  5. ROE 5 Year Average 06/2011 = 7107.57
  6. Return on Investment 06/2011 = 6930.6
  7. Debt/Total Cap 5 Year Average 12/2011 = 0
  8. Debt/Total Cap 5 Year Average 09/2011 = 0
  9. Debt/Total Cap 5 Year Average 06/2011 = 0
  1. Current Ratio 06/2011 = 1
  2. Current Ratio 5 Year Average = 1
  3. Quick Ratio = 1
  4. Cash Ratio = 1
  5. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value Quarterly = 0.02
  2. Price/ Book = 1150.04
  3. Price/ Cash Flow = 16.16
  4. Price/ Sales = 15.85
  5. EV/EBITDA 12 Mo = 16.09

Company: Whiting USA Trust (WHX)

Basic Key ratios

  1. Relative Strength 52 weeks = 69
  2. Dividend 5-year Growth = -0.8
  3. Dividend Yield 5-Year Average = 19.34

Growth

  1. Net Income ($mil) 12/2011 = N/A
  2. Net Income ($mil) 12/2010 = 37
  3. Net Income ($mil) 12/2009 = 37
  1. Annual Net Income this Yr/ Net Income last Yr = 0.82
  1. Annual EPS before NRI 12/2008 = 4.11
  2. Annual EPS before NRI 12/2009 = 2.68
  3. Annual EPS before NRI 12/2010 = 2.7
  4. Annual EPS before NRI 12/2011 = N/A

Dividend history

  1. Dividend Yield = 16.77
  2. Dividend Yield 5 Year Average 12/2011 = 19.34
  3. Dividend Yield 5 Year Average 09/2011 = 19.34
  4. Annual Dividend 12/2011 = 2.95
  5. Annual Dividend 12/2010 = 2.7
  6. Forward Yield = 16.77
  7. Dividend 5 year Growth 12/2011 = -0.8

Dividend sustainability

  1. Payout Ratio 5 Year Average 12/2011 = 0.92
  2. Payout Ratio 5 Year Average 09/2011 = 0.92
  3. Payout Ratio 5 Year Average 06/2011 = 0.92

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -0.32
  2. EPS Growth Quarterly(1)/Q(-3) = -122.39

Albemarle Corp. (ALB)

Levered Free Cash Flow: 241.08M

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $178 million
  3. Net Income 2010 = $324 million
  4. Net Income 2011 = $436 million
  1. EBITDA 12/2011 = $685 million
  2. EBITDA 12/2010 = $513 million
  3. EBITDA 12/2009 = $285 million
  4. Net income Reported Quarterly = $8 million
  1. Total cash flow from operating activities
  2. 2009 = $358.53 million
  3. 2010 = $331.31 million
  4. 2011 = $487.36 million
  1. Cash Flow 12/2011 = 6.01 $/share
  2. Cash Flow 12/2010 = 4.63 $/share
  3. Cash Flow 12/2009 = 2.96 $/share
  1. Annual EPS before NRI 12/2011 = 4.77
  2. Annual EPS before NRI 12/2010 = 3.56
  3. Annual EPS before NRI 12/2009 = 1.86
  4. Annual EPS before NRI 12/2008 = 2.39
  5. Annual EPS before NRI 12/2007 = 2.4

Performance

  1. ROE = 25.61%
  2. Return on Assets = 13.52%
  3. Quarterly Earnings Growth = 17%
  4. Quarterly Revenue Growth = 16.9%
  5. Total return last 3 years = 224.88%
  6. Total return last 5 years = 61.47%
  1. Price to Sales = 1.94
  2. Price to Book = 3.31
  3. Price to Tangible Book = 4.69
  4. Price to Cash Flow = 10.44
  5. Price to Free Cash Flow = 24.7
  1. Current Ratio 09/2011 = 3.38
  2. Current Ratio 5 Year Average = 3.11
  3. Quick Ratio = 2.3
  4. Cash Ratio = 1.33
  5. Interest Coverage 09/2011 = 15.1

Dividend sustainability and history

  1. Payout Ratio 09/2011 = 0.15
  2. Payout Ratio 06/2011 = 0.14
  3. Payout Ratio 5 Year Average 09/2011 = 0.2
  4. Payout Ratio 5 Year Average 06/2011 = 0.2
  5. Change in Payout Ratio = -0.05
  6. Dividend yield 5 year average = 1.4%
  7. Dividend growth rate 3 year Average = 13.43%
  8. Dividend growth rate 5 year average = 14.03%
  9. Consecutive dividend increases = 17 years
  10. Paying dividends since = 1994

Conclusion

Even though the correction of the past few days appears to be strong, the markets are still overbought and need to let out more steam. Prudent investors would do well to wait for a strong pullback before committing funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: 5 Basic Materials Plays: Is ArcelorMittal The Best Choice?

Additional disclosure: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings estimates and growth rate charts sourced from dailyfinance.com.