ArcelorMittal: Profit from the World's Largest Steel Maker

Many investors have never heard of ArcelorMittal (NYSE: MT) and will probably be surprised to learn it is the world's largest steel maker.

Headquartered in Luxembourg, ArcelorMittal has 311,000 employees in more than 60 countries on five continents. This decentralization is especially significant in the context of rising oil prices; the fact that MT has production facilities close to every major market significantly reduces transportation costs.

When you read through MT’s 2007 annual report, you are left with the impression of a company with an insatiable appetite for growth. In just one year, MT entered into a joint venture deal for a steel mill in Saudi Arabia; built a new steel service centre in Poland; completed the acquisition of Sicarsta in Mexico, thereby creating that country’s largest steel producer; received mining concessions in Senegal; purchased a 77% stake in a German gas distribution company to add to its regional energy network; bought a 51% stake in one of Turkey’s largest steel companies and a 70% position in an Italian steel distributor; bought 100% of an Estonian steel galvanizing line; signed a deal with Mozambique to develop mining and manufacturing operations; bought an Austrian steel distributor; purchased a 28% share of a Chinese steel manufacturer and distributor; and more. And the frenetic pace has continued in 2008, including an announcement last week that the company is committing $25 billion for investments in India. It leaves one breathless!

You’d think the company would develop indigestion from all these acquisitions but so far we are not seeing any strong evidence of that. Revenue in 2007 came in at $105.2 billion (figures in U.S. dollars), a 78% increase over the year before. Net income attributable to equity shareholders almost doubled on a year-over-year basis, to close to $10.4 billion compared to just over $5.2 billion in 2006.

First-quarter 2008 results, which were released on May 14, continued to be strong. MT reported sales of $29.8 billion, up 22% from the same period last year. EBITDA came in at $5 billion, up 16%, while net income was $1.4 billion ($1.69 a share), up 5% from the corresponding 2007 period. Looking ahead, the company said it expects EBITDA in the second quarter to exceed $6.5 billion, “largely on account of strong demand for our products across all regions”.

MT is a global growth story if there ever was one, but you also receive some cash flow from the stock. The shares currently pay a quarterly dividend of $0.375 ($1.50 annually), to yield 1.6% on the current price of $95. The dividend is one element of the company’s policy to return 30% of the previous year’s net income to shareholders. The other part is an aggressive share buy-back program which saw ArcelorMittal spend $1.1 billion in the first quarter to repurchase 16.3 million shares in the open market.

There’s one other interesting angle to this story. During a conversation I had with a U.S. money manager last week, he mentioned he was looking into investing in some Chinese steel companies. “That earthquake was devastating. They have to completely rebuild a whole province in that country,” he commented. “That is going to mean a lot of business for steel manufacturers.” As I previously mentioned, ArcelorMittal has interests in China and as the world’s number one steel producer will certainly be in line for a good chunk of that reconstruction business.

The share price took a dip to the $60 range during the January correction but has been on a steady rise since then, trading on Friday at $95 on the New York Stock Exchange, where it trades as an ADR (American Depository Receipt). Despite the rise, the shares still appear to be reasonably valued with a trailing 12-month price/earnings ratio of 13.4.

Obviously, this is not a pure eurozone play but the company is based in Europe and derives a significant portion of its income from sales within the EU. Like all steel companies, ArcelorMittal would be temporarily affected by a world recession but as a long-term international growth stock for your portfolio, it should be a winner.

Disclosure: none

Comments

[User 171371]

MT appears to be a great long term play, but are we late to the party at $95.

The earthquake in China and subsequent rebuilding is also a lead story.

Good article

[Gmel]

How can anyone trust someone like Gordon Pape who spent a decade flogging reverse mortgages to elderly Canadians. I see that Pat Boone is becoming the American version of Gordon Pape. Would you think of asking Pat Boone for unbiased intelligent financial advice?

As it says at www.canretire.com/arti...
Garth Turner, former federal revenue minister, said a reverse mortgage "is an ideal strategy if you hate your children."