ArcelorMittal (MT) is the world's leader in steel production and the paramount force in the industry. It lost over 80% of its market value during the recession and it still has not recovered even though the steel market and the economy have to an extent. Its primary competitors include The United States Steel Corporation (X) and POSCO (PKX).
Why buy ArcelorMittal?
- ArcelorMittal's fair value per share is significantly higher than its current market price, possibly even a 100% or 200% upside from this. This is based on a conservative view of Morningstar's fair value of $46.00 per share. They use an 11% cost of equity assumption, and a 10.4% weighted average cost of capital assumption.
- The company has a great deal of vertical integration, allowing it to be more competitive and flexible than its competitors. Its vertical integration results in lower raw materials costs and higher earnings margins for the firm. It is fairly self sufficient in its downstream side of operations, however, coal is a particular weakness as it is only 20% self sufficient in this area.
- Its global focus and its ability to adapt any part of the supply chain allow it to minimize market exposure compared to rival firms.
- ArcelorMittal's recent expansion into developing economies will yield high rewards for the companies as post-recession four fifths of global steel production comes from these developing economies. It has a significant presence in Brazil with about 30% of market share. This is particularly important due to the large growth of the automotive industry in Brazil, and the hosting of the World Cup and Olympics. These two events in particular will require a great deal of steel and ArcelorMittal is well positioned to take advantage of this.
- The company's dividend is also very attractive. It has a projected yield of 4.35% and it paid out quarterly in amounts of 15.94 cents per share.
- China is a tough nut to crack for ArcelorMittal. The country has about half of the world's steel production but ArcelorMittal has a very small presence there. Also, the Chinese government is not very receptive to foreign direct investment so ArcelorMittal will not find it easy to increase its holdings in China.
- Even though it is largest steelmaker, it has a very small market share due to the stratified nature of the steel industry. The firm has around 10% market share. Nonetheless, ArcelorMittal is looking to increase this figure with heavy CapEx spending of $4.838 billion over the last year.
Therefore, ArcelorMittal is a solid buy for growth investors with a handy dividend on the side. It will continue to acquire new companies over the next couple of years as it turns its focus to the developing markets. The company's M&A strategy has traditionally been very successful so there is no reason to doubt this will continue into the future. The company's strong management and great positioning make this an attractive stock pick over the long run.
Disclosure: I am long MT.