Why We’re Raising Our Price Estimate For ArcelorMittal To $7

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ArcelorMittal’s much improved performance in Q2 is a reflection of the success of a series of company initiatives that have resulted in cost reduction and margin improvement as well as a more favorable business environment in the U.S. With steel prices tumbling globally over the past couple of years as a result of a global oversupply situation, fueled by a rapid increase in Chinese exports, the company has been looking to boost margins through controlling costs at both its steelmaking and mining operations. In addition, the company has also altered its product mix towards higher margin steels such as automotive steels at its NAFTA operations. A combination of a higher margin product mix and successful cost reduction measures are expected to provide a $1 billion boost to the company’s EBITDA in 2016. [1] The success of these initiatives is evident in the improved margins reported by the company in its Q2 results.

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ArcelorMittal’s NAFTA operations have also received a boost from the imposition of punitive tariffs on cheap steel imports by U.S. authorities. The NAFTA division’s realized prices rose sequentially in Q2, partly as a result of dissipating competition from steel imports. Moreover, the U.S. Department Of Commerce (DOC) confirmed the preliminary imposition of punitive tariffs on steel imports from seven countries in its final ruling last week. [2] The DOC had announced the imposition of stringent antidumping duties on steel imports from China earlier in the year as well. [3] With the distorting effect of competition from unfairly traded steels dissipating and the success of the company’s various initiatives, the margins of ArcelorMittal’s NAFTA division have recovered smartly and we have revised our forecasts for the same.

The success of operational improvements and cost reduction initiatives at other divisions has prompted us to revise our forecasts for these divisions as well. Furthermore, the company has managed to pare its debt as well. With ArcelorMittal’s debt rated speculative grade by major ratings agencies, the company made debt reduction a priority. Using the proceeds of an equity offering in Q2, the company’s debt to EBITDA ratio has improved significantly.

MT Debt to EBITDAIn addition to the aforementioned developments, the company has also managed to rationalize capital spending. All in all, ArcelorMittal has made the right moves to boost its business prospects and with regulatory support, the external environment has become more favorable, too, particularly in the U.S. Our revisions to the forecasts for ArcelorMittal’s various business drivers as a result of these developments has translated into a new Trefis price estimate for the company.

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Notes:
  1. ArcelorMittal’s Q4 2015 Earnings Q&A, ArcelorMittal Website []
  2. US issues final antidumping duties for hot-rolled coil steel from seven nations, Platts []
  3. U.S. levies hefty duties on Chinese corrosion-resistant steel, Reuters []