Why ArcelorMittal’s Stock Could Rise Another 50%?

ArcelorMittal’s stock (NYSE: MT) has seen a lot of volatility in 2020 so far. The stock plunged more than 60% from $18 at the beginning of the year to $7 as on 18^th March 2020, due to the outbreak of coronavirus. But with the US government announcing a number of measures to keep businesses afloat, market sentiment improved over recent weeks – helping ArcelorMittal’s stock to partially recover 43% in the last two months to reach close to $10 as on 26^th May 2020. However, we believe that the market is still undervaluing the company, and we estimate ArcelorMittal’s valuation to be $15 per share – roughly 50% ahead of the current market price. Our price estimate takes into account the latest earnings as well as the company’s guidance.

Company Overview and General Reference

• ArcelorMittal is one of the largest global steel companies, with its customers spread across the Construction, Transport (including automotive), and Oil & Gas industries. The company operates in various geographies and faces competition from US Steel, Nucor, Nippon Steel, etc.
• Though ArcelorMittal reported a 23% y-o-y reduction in revenue in Q1 2021 with net loss of $1.1 billion as against a profit of $0.4 billion a year ago, the company remains well on course to meet its near-term net debt target of $7 billion. Management has also announced steps to cut down on fixed costs in order to support margins and new liquidity enhancing measures in 2020, which together has placed ArcelorMittal in a better position to deal with the current crisis, compared to its rivals like US Steel.

Company Revenues

ArcelorMittal reported $70.6 billion in total revenues for full-year 2019. This includes 5 operating segments-

• NAFTA: $18.6 billion in 2019 (26% of total revenues). Flat, Long, and Tubular operations of the USA, Canada, and Mexico
• Brazil: $8.1 billion in 2019 (11% of total revenues). Flat operations of Brazil, and the Long and Tubular operations of Brazil and its neighboring countries including Argentina, Costa Rica, Trinidad and Tobago, and Venezuela
• Europe: $37.8 billion in 2019 (53% of total revenues). Flat, Long, and Tubular operations of the European business, as well as ArcelorMittal Distribution Solution (AMDS)
• ACIS (Africa & Commonwealth of Independent States): $6.8 billion in 2019 (10% of total revenues). Steel sheets and plates as well as tubular items like pipes, that are made by rolling processes in ACIS region
• Mining: $4.8 billion in 2019 (7% of total revenues). Iron ore and coal operations

Corporate and Eliminations of $5.4 billion constitute -7% of revenue

For 2020, we expect the company’s revenues to decline significantly to $60 billion on the back of a drop in global steel prices and lower demand due to the pandemic. We discuss ArcelorMittal’s revenues by operating segments over the years along with forecast in detail in a separate dashboard along with comparison with peer US Steel.

Net Income and EPS

• Net income margin increased from 3.1% in 2016 to 6.8% in 2018, before turning negative at -3.5% in 2019. The company reported a loss in 2019 due to a drop in revenue on account of lower steel prices due to US-China trade war, while cost of sales remained high as the price of primary input – iron ore – did not see a corresponding drop.
• Thus, after increasing from $1.86/share in 2016 to $5.04/share in 2018, EPS dropped to -$2.42/share in 2019.
• The company is expected to report losses in 2020 as well, however, the margins are still expected to be much better than its competitors.
• The management has been proactive and is focused in reducing its fixed cost in order to support margins, for which some important steps announced are – a) temporary labor cost savings; salary cuts; reduction/elimination of contractors, overtime reduction etc. b) reduction in repairs and maintenance (R&M) expenses: spend expected to be lower due to lower operating rates; and c) reduced SG&A expenses: Fixed cost savings achieved from countries in which the company operates where the currency has depreciated, as well as reduced SG&A expenses such as IT, travel, sales and marketing expenses, consultancy fees etc.
• We expect ArcelorMittal to report net income margin of -5% in 2020, which is likely to be much better than -8% in the case of US Steel.

Share Count and Revenue Per Share

• As the company is likely to report losses, we use the P/S multiple for valuation.
• Share repurchases over the years have decreased share count from 1,024 million in 2017 to 1,013 million in 2019. This figure is expected to drop to 1,010 million in 2020, giving a revenue per share of $59.41 in 2020, much lower than the $69.71 in 2019 due to lower revenues.
• As per ArcelorMittal valuation by Trefis, we have a fair price estimate of $15 per share for the company’s stock, which values each share at a P/S multiple of 0.25x. This is higher than the current P/S multiple of 0.17x and much higher than US Steel’s forward P/S multiple of 0.11x.
• We believe that ArcelorMittal could command a favorable valuation multiple due to the management sticking to its plan of deleveraging, asset optimization, and the recent liquidity enhancement measures despite the ongoing crisis.

The company, with its liquidity position (cash and cash equivalents and availability under credit facilities) of approximately $10 billion as on March 31, 2020, supplemented by a new $3 billion credit facility as announced on April 16, 2020 (and fully executed on May 5, 2020), is in a comfortable position to tide over the current pandemic.

It would also be interesting to know why close rival US Steel’s stock declined 75% in the last 3 years.

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