ArcelorMittal Corp (MT), based in tiny Luxembourg, is the world's largest steel-making company and has been so since the merger between Arcelor, a mostly European steel company, and Mittal Steel, a more diverse operation. Beyond its steel operations, ArcelorMittal has a large iron ore mining business, one that protects the company's costs for steel-making and that allows them to sell iron ore to other companies. The combined company currently has a market capitalization of $26.3B and trades on several European exchanges, as well as the NYSE.
Like most industrial companies, ArcelorMittal bottomed out in the aftermath of the 2008 financial crisis, with their earnings dropping from $6.84 EPS in 2008 to $.11 EPS in 2009 (numbers based on MT's annual reports). ArcelorMittal bounced back over the following years to $1.93 Earnings per basic share in 2010 and $1.46 EPS (basic share) in 2011.
Both earnings missed estimates however, and along with the ongoing concern about the Euro, as well as the recession in Europe, the stock price has suffered, trading in a range of 14.77-23.80 since the calamitous debt limit talks of last August. After rallying ahead of the market during much of the past six months, ArcelorMittal has fallen back towards their lows since the beginning of March.
With ArcelorMittal closing at $16.95 yesterday, the stock is becoming more and more of an attractive buy. Does that mean that the stock is worth buying? Here are a few things to consider:
ArcelorMittal is expected to grow earnings to $1.95 EPS in FY2012 and $3.18 EPS in FY2013, roughly a 50% annual clip. ArcelorMittal hasn't had a stellar record of meeting earnings estimates, but they have been consistently profitable. Management provided guidance for the first half of 2012 in their 2011 year-end conference call, stating that 1H2012 should be better than their disappointing 2H2011, though not as good as 1H2011.
Their EBITDA forecast is for a range between $5-6 billion, compared to $10.1 billion total for 2011. Many expect Europe as a whole to rebound in the second half of the year, which would have a positive impact on ArcelorMittal; the last time the company had a stronger second half than first half of the year was in 2009, when the initial post-crisis recovery was in high gear.
As mentioned above, ArcelorMittal has a sizable mining business for both iron ore and coal. Last year they produced an Ebitda of $3.063 billion, a 35% improvement over 2010. For comparison, Cliff Natural Resources (CLF) had total 2011 EBITDA of $1.769 billion. ArcelorMittal seeks to grow production in these areas by 10% over 2012, and are spending their entire capital expenditure budget ($4-4.5B) on growing their mining business. Low material prices, especially iron ore, mean ArcelorMittal does not expect to grow EBITDA for the next year in this business. Still, the benefits of running such a large mining business are apparent for a steel company that relies on iron ore as an input.
I ran a comparison of ArcelorMittal and steel companies Nucor Corporation (NUE), US Steel (X), and AK Steel (AKS). For a mining comparison, I included Cliff Natural Resources. I compared the companies revenue growth year over year and 4Q over 4Q, their estimated earnings growth for the next two years, their P/E multiples based on last year's and the next two years' earnings, and their dividend yield (research based on WSJ and TDAmeritrade figures). The results are:
As of Q4 2011
Revenue Growth (based on this year Q4)
Yearly Revenue Growth
Estimated Earnings Growth (annual for next 2 years)
P/E on '11 Earnings
P/E on '12 Earnings (Estimated)
P/E on '13 Earnings (Estimated)
Price (as of April 19th close)
Compared to its steel rivals, ArcelorMittal trades at an attractive valuation. On a forward earnings basis for 2012, the other three steel companies are valued at either 11 or 14x earnings, whereas Arcelor is around 9x (the reason for the discount is obvious, and we'll get to that soon). The discount isn't quite as steep for 2013 earnings, but this chart suggests that ArcelorMittal could trade at a 12x earnings multiple, as it is roughly doing now for last year's results, without being overvalued.
A comparison to Cliff, by the way, suggests that neither company's stock price is very high compared to earnings, with CLF getting shortchanged for their huge earnings last year and the tough comparison they face going forward, and MT's growth not earning much respect. Both firms, however, pay quite nice dividends.
Which leads to the next point. At April 19th closing price, ArcelorMittal has a 4.42 % yield. The company began paying a dividend in 2005, increased it by 275% over the next three years, and then cut it in half in the aftermath of the crisis in 2009. It has stayed at that halved level, which comes to $.75/share yearly.
The payout ratio, based on last year's earnings, is 51.3%, and on this year's expected earnings an even more manageable 38.4%. Management's comments suggest that they view the current levels as a floor for their dividend. While it's reasonable to expect that management will be more cautious about increasing the dividend as growth returns, an increase still could come once Arcelor's path stabilizes. In the meantime, a utility company level yield is nothing to scoff at.
Also, briefly about currency issues: the dividend is based on the dollar level and then converted into Euros each quarter for the European stock exchanges. So for a U.S. investor, no conversion concerns.
While the overall debt of the company is quite high, at $23.824 Billion, there are good things to say here as well. The current ratio is 1.49, the quick ratio is .58, and the long-term debt to equity ratio is .39. The company is a year ahead of schedule in their debt reduction plan, having reduced net debt to $22.5 Billion, and they've delayed the maturity of their debt from an average of 2.8 years to an average of 6.3 years. In other words, they've given themselves a cushion to work with as far as debt goes.
Europe and Macroeconomics
The obvious discount factor to ArcelorMittal is Europe. The company's stock largely trades on European news as well as the global macroeconomic outlook. Those prospects have materially affected ArcelorMittal's decisions. The company is pretty unpopular in the area right now for temporarily or permanently closing factories or laying off workers in Belgium, France, Luxembourg, and Spain. Both Nicolas Sarkozy and Francois Hollande, the leading candidates in the France presidential election, have visited with unions opposed to ArcelorMittal's cuts. ArcelorMittal's steel growth capital expenditure budget for 2012 has been temporarily suspended, or in other words is expected to be 0 for the year.
The only insight I'd add here is that the company produces more than 40% of its steel outside of Europe and North America. ArcelorMittal has strong business in North America, Latin America, Africa, and the CIS (the former-Soviet region). Brazil, for example, is a key area for ArcelorMittal. Interestingly, the company does not have huge business in India and China at this point, though they are seeking to grow in both areas. China's big impact on ArcelorMittal is secondhand, through the country's impact on global steel demand.
Given all these factors, ArcelorMittal is an intriguing pick under the following three circumstances:
1. As a speculation on a company trading at about half of what it was trading in July, and near its 10-year lows. On a speculative basis, it seems like ArcelorMittal has a lot more upside than downside.
2. As a trade. ArcelorMittal is a high beta stock, swinging up and down in 3 or 4% chunks at least once or twice a week. On the next major positive Eurozone/bailout development, news that usually lasts for a month or two, MT could easily bounce back into the low 20s it was trading in over the first two and a half months of 2012. Hitting 20 from the current price would be a nearly 20% gain.
3. As a long-term investment based on the global recovery. If the economic recovery is still in its early stages, which is not an outlandish proposition, then we could see a lot more growth in developed countries to go along with the developing market growth. While the process has been and will likely continue to be slow, over the longer term of the next 5 years, it is hard to see anything but an improvement in global economic conditions. This will be a good thing for ArcelorMittal as a steel company providing the materials to build this growth.
Reasons not to invest in ArcelorMittal are that Europe is still in a very tumultuous period and the Eurozone might yet collapse. Global slowdown could persist, driven by a hard landing in China, the Euro issues, and continued stagnation in the U.S. These conditions would both materially affect ArcelorMittal's earnings and depress their stock price on a reputation-basis, making this the wrong time to buy.
As you might guess from the overall tone of this article, I am bullish on ArcelorMittal's prospects. The company is well-diversified globally, has repositioned themselves well since the crisis, and will do well in the rest of the decade as the recovery strengthens and we finally grow past pre-crisis levels, which I believe will happen. This is also a good time to open a position in MT, as the dividend appears fairly safe at current levels with possible long-term upside.
Anything above a 4% yield is promising in a low-growth environment, and ArcelorMittal's stock price should appreciate in a mid or high-growth environment. I'm still deciding whether to make my recently opened position a trade or an investment, depending on the outlook for Europe and the global economy as a whole over the coming months and years. In any case, I may consider doubling my investment if the stock drops to or below 15, where the yield passes 5%.
A 12x P/E for 2012 forecasted earnings would mean a 23.4 price per share, with that growing to 38.16 on 2013 forecast earnings. That's a 38% and a 125% upside, respectively, before considering the dividend. Forward earnings are of course just estimates, and I've talked about the main factors that might tarnish this picture.
But while ArcelorMittal is definitely not a can't-lose proposition (after all, no stock is), it does offer a few good chances to win.