ArcelorMittal: a Screaming Buy

ArcelorMittal (MT) has been reporting continued decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment, eating into the company’s key margins.

Some positives

ArcelorMittal has an ongoing solid liquidity position with average debt maturity of 6.3 years. The key maturities in 2015 are comprised of $500 million worth of bonds to be redeemed in 2016 or before then on October 22, 2015. ArcelorMittal has a consolidated $6 billion line of credit which is refinanced and widened in April 2015, comprises of two key branches including, $2.5 that matures in April 2018 and $3.5 billion that matures in April 2020.
The company has net debt-to-LTM EBITDA covenant of 4.25x. Further, there’s mixed rating being given by the key rating agencies including, S&P having a stable growth outlook on the stock with -BB rating, Moody’s and Fitch both having negative growth outlook for the stock with –Ba2 and –BB+ ratings respectively.

ArcelorMittal is strategically controlling its year-over-year working capital expenditures with the business targeted on investing in working capital as necessity arises. Also, total debt for the quarter has only marginally grown owing to recurrent, well-planned investments in running capital.

The impressive debt-controlled, minimized capital expenditures and solid liquidity position of ArcelorMittal have encouraged the company to offer outstanding shareholder returns while delivering sustainable year-over-year growth.

Challenges

The global markets seem extremely challenging with estimated demand declining in all the key markets but Europe. The major exports from China are also growing at weak margins along with the global commodity pricing environment poorly impacting the key domestic markets as the steel purchasers employing “wait and see” approach. Moreover, as the international pricing environment stabilizes it is expected to finish destocking cycle.

In addition, the demand forecasts are extremely positive with solid growth in real demand estimated to continue in key developed markets. The US ASC is believed to enhance during 2016 with the closure of prospective destocking cycle. Going forward, the developing market demand is expected to decline slowly with demand in China forecasted to become steady and having no further growth in exports.

The ongoing global recovery in commodity demand and pricing environment is forecasted to continue steadily both over a short-term and over a longer term with group steel deliveries believed to be somewhat better during 2015 compared to the last year and estimated to grow during 2016 as well.

Although, the market conditions were extremely challenging during the fiscal years 2013 till 2015 still long-term prospective demand seems well-established and continued medium-term growths expected in the key USA and European markets.

TheStreet Ratings team rates ArcelorMittal SA as a “Hold” with a ratings score of ‘C-‘ and primarily driven by several of the company’s weaknesses which are believed to outweigh any of its strengths and thus making it difficult for the investors to record profitability. The company's major strengths are observed in several areas, like its robust earnings per share growth and expansion in net income. Contrastingly, certain weaknesses include poor return on equity, declining profit margins and disappointing cash flow from operations.

The consensus estimate among 34 polled investment analysts evaluating ArcelorMittal SA suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments got better on Jun 19, 2015. The earlier consensus estimate suggested investors to ‘hold’ their position in the company.

A majority of the key investment analysts are extremely positive about the long-term growth prospects of ArcelorMittal, driven by the ongoing slow but steady improvement in the global commodity demand and pricing environment and encouraging the company to provide sustainable and significant shareholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in ArcelorMittal SA considering the company’s significant long-term growth prospects and currently weaker cash position with significant total debt of $20.39 billion against smaller total cash standing of $3.64 billion only, restricting the company to make future growth investments. The profit margin of -3.24% is unsatisfactory and depicts no profit but loss. The PEG ratio of -0.07 signifies no growth but decline compared to solid industry’s growth average of 0.18.
Published on Apr 11, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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