Despite a 46% rise since the March lows of this year, at the current price of about $10 per share we believe ArcelorMittal stock (NYSE: MT) still has significant upside potential. ArcelorMittal stock has rallied from $6.95 to $10.16 off the recent bottom compared to the S&P 500 which has increased around 35% from its recent bottom. The stock was able to beat the broader market in the last 3 months as steel prices are expected to rise in the near term with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat, and with the Chinese economy opening up, which led to expectations of a rise in steel demand and reduction of supply constraints.
With the stock still about 42% below the levels seen at the end of 2019 and 51% below the 2018 levels, we think it still has potential to rise further despite a strong recovery over the last three months. Our dashboard What Factors Drove -69% Change In ArcelorMittal Stock Between 2017 And Now? provides the key numbers behind our thinking.
Some of the stock price decline over the last two years is justified by the 48% decline in P/S multiple. This is despite a cumulative rise of 2.8% in revenues between 2017 and 2018, which in turn led to a 3.5% rise in revenue per share (RPS) during this period as the number of shares outstanding saw a marginal decline. However, despite this marginal rise, the P/S multiple declined sharply as the stock price saw a drop since 2017. Global steel prices declined due to the US-China trade war, while the price of the primary raw material (iron ore) remained elevated, which led to the company reporting losses in 2019. Thus, revenue decline along with losses led to a decline in the stock price, thus affecting its valuation multiple.
The P/S multiple declined from 0.5x at the end of 2017 to 0.3x at the end of 2019. The multiple dropped even further and currently stands at 0.1x. The drop in P/S multiple in 2020 was led by a further drop in steel prices following the outbreak of coronavirus. However, we believe that the company’s P/S multiple has the potential to go back to its historical level, leading to a rise in stock price in the near term.
What’s the likely trigger for an upside?
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The steel demand from industry players affects global steel price levels, in turn impacting the company’s price realization for its products. Lower demand from construction and automobile players, has led to a drop in global steel prices recently, which had already seen a drop due to the US-China trade war. Additionally, with the outbreak and spread of coronavirus leading to expectations of further slowdown in economic activity and demand, steel prices have remained under pressure. This was confirmed to a certain extent in the Q1 2020 results, where we saw a 23% decline in ArcelorMittal’s revenues, while it also reported a loss of $1.11 per share compared to a profit of $0.41 per share in Q1 2019. The company’s Q2 2020 results are expected to be worse considering the full impact of the crisis will be reflected in Q2 numbers.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become more important in finding value.
With the lifting of lock downs, and as global economies open up, steel demand is expected to rise while supply constraints will also decline, leading to a rise in steel shipments. The US raw steel capacity utilization for the week ending 20th June 2020 was 54.6%, which is significantly lower than 80.1% recorded in the prior year period. However, this is an improvement over the 51% utilization in the beginning of May 2020, which indicates that there are signs of a rebound in activity in the steel space. Expectations of revenue and earnings rising toward the end of 2020 and with investors’ focus shifting to 2021, ArcelorMittal’s stock could see a significant upside in the near term. As per ArcelorMittal valuation by Trefis, we have a price estimate of $15 per share for MT’s stock, which is higher than its current market price of $10.
While ArcelorMittal’s stock price could rise sharply, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.
For further insight in the steel sector, see how ArcelorMittal compares with US Steel.