Despite doubling from its March lows of this year, at the current price near $14, we believe ArcelorMittal’s stock (NYSE: MT) is slightly undervalued. ArcelorMittal stock has rallied from $7 to $14 off the recent bottom compared to the S&P 500 which has increased a little less than 50% from its recent bottom. The stock was able to beat the broader market in the last 6 months as steel prices are expected to rise in the near term. 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, led to expectations of a rise in steel demand and reduction of supply constraints.
With the stock still more than 20% below the levels seen at the end of 2019, we think it still has potential to rise further despite a strong recovery over the recent months. Our dashboard What Factors Drove -57% Change In ArcelorMittal Stock Between 2017 And Now? provides the key numbers behind our thinking.
Some of the stock price decline between 2017-2019 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. Despite this 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 took a heavy toll on the stock price, thus affecting its valuation multiple.
The P/S multiple halved from 0.50x at the end of 2017 to 0.25x at the end of 2019. The multiple dropped even further and currently stands at 0.20x. 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 at least to its 2019 level of 0.25x, leading to a rise in stock price in the near term.
Trigger for Upside?
The global spread of coronavirus led to lockdown in various cities across the globe, which 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 in 2020, which had already seen a drop due to the ongoing US-China trade war. This was confirmed to a certain extent in the Q2 2020 results, where we saw a 43% decline in ArcelorMittal’s revenues, while it also reported a loss of $0.50 per share compared to a loss of $0.44 per share in Q2 2019.
However, 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 12th September 2020 was 65.1%, which is significantly lower than 77.4% 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 the 2021 numbers, ArcelorMittal’s stock could see an upside in the near term. As per ArcelorMittal valuation by Trefis, we have a price estimate of $15 per share for MT’s stock, reflecting almost a 10% rise from its current level.
For further insight in the steel sector, see how ArcelorMittal compares with US Steel.
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