ArcelorMittal: Is It a Buy?

ArcelorMittal (MT) announced first quarter ended April 30, 2016 net sales of $13.4 billion, down 4 percent sequentially from $14.0 billion in fourth quarter of 2015 and down 22 percent year-over-year from $17.1 billion in first quarter of 2015.

ArcelorMittal declared first quarter of 2016 operating income of $275 million or basic loss of $0.23, down 52 percent year-over-year from $571 million or basic loss of $0.41 during the same period last year but, significantly and sequentially better than fourth quarter of 2015 operating loss of $5.3 billion or basic loss of $3.72 per share.

The global steel maker reported continued sequential and year-over-year decline in its top line primarily driven by the ongoing weaker global commodity demand and pricing environment, eating into the company’s key margins.

ArcelorMittal has uniquely strengthened its financial position with a net debt reduction of about 19.2% from 32.5 billion of total debt in third quarter of 2008 to 13.3 billion of pro-forma net debt in first quarter of 2016.
The company has strategically resolved 2.8 billion pounds of rights issue coupled with a planned 0.9 billion pounds of gestamp stake deal which has generated impressive proceeds from the transaction that is being leveraged by the company to prepay designated near-term debt maturities. Further, ArcelorMittal has a solid pro-forma liquidity of $9.0 billion with an average pro-forma debt maturity stretched to about 6.8 years.

Positives to consider  

The global steel manufacturing company strategically reduced its capital expenditure by nearly $2.3 billion and impressively lowered net interest by approximately $0.8 billion since 2012 while concluding 2015 with total debt of about $15.7 billion which is expected to be the smallest level since the strategic merger of ArcelorMittal.

Therefore, well-planned initiatives taken to minimize cash obligations allowed total debt minimization during 2015. However, the previous one year was extremely challenging with 4.3% reduction in Chinese steel demand, 10% reduction in US steel demand coupled with 70 pounds per ton reduction in Europe HRC pricing and nearly 43% fall in global iron ore pricing.

The impressive net debt minimization techniques of ArcelorMittal in addition to superior control on total capital expenditures and net interest expenses since 2012 has successfully enabled the key steel manufacturer to deliver profitability amid continuing tough global commodity demand and pricing environment while delivering attractive shareholder returns.

Catalysts to watch

The worldwide pricing environment has enhanced notably and consistently since the poor and unsustainable pricing levels during the second half of 2015 with healthy growth in China steel spreads and European steel spreads. Further, the international core markets have grown slowly but consistently since the global meltdown of 2008 which has resulted in solid demand growths in automotive, machinery and construction sectors.

The Europe and the US antidumping or CVD trade case timelines are consistently gathering pace which signifies slow but consistently improving global commodity demand and pricing environment. In addition, imports from China to the US have declined notably with April year-till-date imports of carbon flat rolls to the US having declined 33% year-over-year, the market share of flat roll imports declined to 17% for April year-till-date as against 24% during the same period last year. Importantly, these notable reductions in imports into the US have significantly benefited the domestic producers with 3% year-over-year growth in year-till-date domestic shipments.

The consistent improvement in global commodity demand and pricing scenario is believed to deliver attractive company growth while benefiting the steel major’s key margins, allowing it to make future growth investments while delivering attractive shareholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in ArcelorMittal considering the company’s significant long-term growth prospects but, currently weaker financial position with significant total debt of $20.19 billion against weaker total cash position of $2.86 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -12.75% seems disappointing and signifies no profit but loss. The PEG ratio of -0.27 appears misguiding and indicate no near-term growth but decline.
Published on Jul 21, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...