Is The Market Undervaluing ArcelorMittal’s Stock?

ArcelorMittal (NYSE: MT) has seen its stock price decline by over 33% from $30 to $20 over the last six months. The company’s current stock price of a little over $22 reflects a forward price-to-earnings (P/E) ratio of approximately 6x, which is lower than the average forward P/E multiple of 7.2x for major iron ore miners and much lower than the average forward P/E multiple of 12.8x for the broader metals and mining industry. Thus, at this point ArcelorMittal’s stock seems to be undervalued. The Trefis price estimate of $35 per share for ArcelorMittal’s stock is driven by expected earnings per share (EPS) of $3.71 in 2019 and a forward P/E multiple of 9.4x, reflecting a possible upside of over 50% from its current price level.

We have summarized our key assumptions for MT’s stock valuation in our interactive dashboard – Assessing ArcelorMittal’s Stock Valuation And The Potential Upside. In addition, here is more Materials data.

Factors Justifying A Higher Fundamental Stock Value

Increasing revenues

• We expect total revenue to grow by 2.2% to $77.7 billion in 2019, slower than 10.7% growth achieved in 2018. Sales growth would likely be driven by recent acquisitions, stable demand conditions, partially offset by decline in Chinese demand.
• Revenue from NAFTA is expected to increase by 2.5% in 2019, much slower than the 13% growth achieved in 2018, mainly driven by modest increase in volume and prices in the region.
• Revenue from Brazil is expected to increase by 5.1% in 2019 (compared to 12.3% a year ago) primarily due to positive impact of the Votorantim acquisition in 2018. Similarly, acquisition of Ilva is expected to drive revenue growth in Europe

Higher Margins

• Net income margin is expected to increase from 6.8% in 2018 to about 8% in 2019 due to cost efficiencies as the company nears the end of its Action 2020 Plan.
• This five-year plan – announced in 2015 – targets an improvement in structural EBITDA of $3 billion and to deliver annualized free cash flow in excess of $2 billion by 2020.
• As the company could not achieve much under the program due to operational disruptions during 2018, we expect MT to direct most of its focus toward improving its volume and margins over the next two years.

EPS and Price-To-Earnings Ratio

• We expect MT to report an adjusted EPS of $3.71 in 2019, driven by higher revenues and increase in margins led by cost efficiencies projected to be achieved under Action 2020 Plan.
• Based on its current stock price, ArcelorMittal’s forward P/E multiple of 6.0x is lower than the average P/E multiple of 7.2x for major iron ore players and much lower than the average forward P/E of 12.8x for the metals and mining industry at large, indicating that the company’s stock is presently undervalued.
• Among its peers, only RIO (Rio Tinto) and VALE (Vale SA) have multiples higher than the iron ore industry average, whereas CLF (Cleveland-Cliffs) and X (U.S. Steel Corp) lag because of their size and profitability.
• We believe that ArcelorMittal is more comparable to RIO and VALE because of its size, revenue generation, and earnings capabilities. However, RIO and VALE enjoy a slight premium over MT because of their successful initiative in improving margins and cleaning up of their balance sheets. Additionally, MT’s larger share of lower-grade reserves compared to Rio and Vale drives a lower P/E multiple in comparison. CLF and X have much lower multiples among all peers because of their smaller size and geographical concentration.
• Thus, based on ArcelorMittal’s size and earnings potential being more comparable to RIO and VALE, we believe that a forward multiple closer to 9.4x (slightly lower than  Rio and Vale) would reflect the actual fundamental value of the company’s stock.

Risk v/s Opportunities

• The biggest risk that MT faces is the slowdown in China. The company projects a decline of 0.5%-1.5% in demand from China in 2019, as relatively stable demand from automotive and construction is offset by declining machinery output. This is in contrast to a demand growth of 3.5% in China during 2018. Though ArcelorMittal has minimal exposure to China, a slowdown in Chinese demand would likely have an adverse impact on global steel prices.
• However, rising demand in emerging markets other than China, strong projected inorganic growth with two major acquisitions in 2018, and higher margins and enhanced cash flow generation under the Action 2020 Plan would support MT’s growth story.
• Additionally, the company is close to completing its acquisition of Essar Steel which would expose it to the growing Indian market, which could further drive growth in MT’s stock price in 2019.

Thus, as per Trefis’ valuation and analysis, MT’s stock has a potential upside from its current level. Trefis’ price estimate of $35 per share for ArcelorMittal’s stock is much higher than its current stock price.

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