Why ArcelorMittal (MT) Is The Best Steel Stock Today
Zacks Investment Research | Nov 17, 2017 02:33AM ET
ArcelorMittal (NYSE:MT) – the biggest steel producer on the planet – is having an impressive run of late, thanks to improving global steel market conditions and the company’s internal initiatives.
The Luxembourg-based company has seen its shares shoot up roughly 34% so far this year. The stock is also up around 29% over the last six months.
ArcelorMittal has also seen strong earnings estimate revision activity over the past month, suggesting analysts are becoming more bullish on the firm’s prospects in both the short and long term. The Zacks Consensus Estimate for 2017 has shot up roughly 16% over the last 30 days. Moreover, the Zacks Consensus Estimate for 2018 has risen roughly 9% over the same period.
This has helped ArcelorMittal to earn a Zacks Rank #1 (Strong Buy), further underscoring the company’s solid position. You can see industry it belongs to year to date. The company’s shares have gained 28.2% over this period, compared with roughly 4.4% gain recorded by the industry. Moreover, the company has outperformed other major players in the steel space such as United States Steel Corp. (NYSE:X) , Nucor Corp. (NYSE:NUE) , AK Steel Holding Corp. (NYSE:AKS) , Olympic Steel, Inc. (NASDAQ:ZEUS) and Steel Dynamics, Inc. (NASDAQ:STLD) over the same timeframe. Shares of U.S. Steel, Nucor, AK Steel and Olympic Steel have lost roughly 18%, 8%, 57% and 21%, respectively, year to date while Steel Dynamics has gained a paltry 4%.
Valuation Looks Attractive
Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest, Tax, Depreciation and Amortization) multiple, a preferred valuation metric for cyclical industries like steel, ArcelorMittal is currently trading at trailing 12-month EV/EBITDA ratio of 4.9, lower compared with the industry average of 6.3. The stock also looks cheaper compared with U.S. Steel, Nucor, AK Steel, Steel Dynamics and Olympic Steel with respective readings of 6.3, 8.4, 5.8, 7.8 and 10.6.
Strong Q3 & Upbeat Outlook
ArcelorMittal delivered solid results in third-quarter 2017. The company saw its profits zoom around 77% year over year to roughly $1.2 billion or $1.18 per share in the quarter. Earnings per share also topped the Zacks Consensus Estimate of 86 cents.
In fact, the company has outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering a positive average earnings surprise of around 42%.
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Higher steel shipments as well as improved steel and seaborne iron ore prices led to a roughly 22% year over year rise in revenues to $17,639 million in the third quarter. Total steel shipments rose around 7% while steel selling prices went up roughly 15% in the quarter.
ArcelorMittal, in its third-quarter call, said that market conditions are favorable and demand environment remains positive along with healthy steel spreads. It continues to see global apparent steel consumption to grow in the range of 2.5-3% for 2017.
Steel market conditions have improved lately, driven by favorable developments on steel trade cases across the United States and Europe in the recent past, providing reprieve to steel producers including ArcelorMittal. The overall demand fundamentals for steel also remain healthy. ArcelorMittal also gained from higher steel prices in the third quarter, driven by strong pricing in Europe – the company’s biggest market.
China’s actions to reduce its excess steel supply are also expected to lend support to global steel prices moving ahead. Beijing has started implementing a four-month reduction in output to streamline its burgeoning steel sector and control pollution during the winter months. China plans to cut its steel production capacity by around 50 million metric tons in 2017 in a bid to reduce overcapacity.
China’s finished steel exports also slumped around 35% year over year to 4.98 million tons in October, per data released by the General Administration of Customs. The country’s steel exports are also down roughly 30% for the first ten months of 2017. Positive rulings in trade cases (resulting in levy of heavy tariffs) against China is contributing to a decline in Chinese steel exports.
Action 2020 Initiatives to Boost Profitability
ArcelorMittal remains focused on implementing strategic measures under its Action 2020 plan to drive profitability. The Action 2020 plan, a strategic roadmap for each of the company’s key segments, targets a structural EBITDA improvement of about $3 billion. Upon full achievement of the plan, the company expects to deliver free cash flow of more than $2 billion annually. The company’s EBITDA jumped roughly 36% year over year to around $6.3 billion in the first nine months of 2017.
ArcelorMittal also remains on track with its cost-reduction actions under the Action 2020 program. The program contributed $900 million to operating results in 2016 and is expected to make a healthy contribution in 2017.
Also, in sync with the Action 2020 plan, ArcelorMittal recently announced a three-year investment program of roughly $1 billion at its Mexican operations. The investment, which is geared toward improving the quality and efficiency of operations, will allow ArcelorMittal Mexico to produce 2.5 million tons of flat rolled steel that will be supplied to customers of domestic non-auto and general industry.
Ilva Buyout to Provide Attractive Growth Platform
The planned acquisition of Ilva S.p.A. in Italy represents another attractive growth opportunity for ArcelorMittal. Ilva is expected to be a good investment without compromising on the strength of the company’s balance sheet. It will provide an opportunity to expand leadership and product offering in Italy, the second-largest steel producing and consuming market in Europe.
The buyout is expected to create synergies of €310 million by 2020, excluding impact from volume improvements and fixed cost reductions. Ilva is also expected to be EBITDA accretive to ArcelorMittal in one year, and free cash flow accretive in three years.
Deleveraging Actions on Track
ArcelorMittal remains highly focused on deleveraging its balance sheet. It has cut net debt by nearly 45% over the past five years. Proceeds from the company’s $3 billion rights issue and the sale of its minority stake in automotive metals component company Gestamp have helped it to pare debt and strengthen its balance sheet. The company's net debt fell by $0.2 billion year over year in the third quarter.
ArcelorMittal’s sustained commitment to cut debt is leading to lower net interest expenses (down 20% year over year in the third quarter). These moves are also expected to lead to better operational performance in the long run.
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