ArcelorMittal stock (NYSE: MT) increased 10.5% in a day on September 28, 2020. This was after the announcement of Cleveland-Cliffs deciding to buy ArcelorMittal’s US operations in a $1.4 billion cash and stock deal, expected to close later this year. ArcelorMittal will receive over $500 million in cash upfront while the remaining portion will be almost a quarter share in Cleveland-Cliffs stock (NYSE: CLF). After completing a $2 billion asset sale to reduce debt, this deal will help MT to repurchase shares with the $500 million cash proceeds. Also, this includes only the sale of its US assets, while MT will continue to serve North American markets with operations in Canada and Mexico. Thus, expectations of lower debt burden, gradual recovery in the steel market, and the new share repurchase program led to 10.5% intra-day spike in MT’s stock. Despite this rise and the fact that the stock is up almost 2x in the last 6 months, we believe that ArcelorMittal’s investors could see a further growth of close to 15% in wealth. Our dashboard What Factors Drove -59% 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, 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 close to 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.
Where Is The Stock Headed?
The coronavirus induced lockdown in various cities across the globe affected industrial and economic activity. This led to a drop in the steel demand from industry players, 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 19th September 2020 was 64.5%, 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. Additionally, plans to enhance shareholder returns with buybacks and projection of lower interest outgo bodes well for the stock. As per ArcelorMittal valuation by Trefis, we have a price estimate of $15 per share for MT’s stock, reflecting almost a 15% potential upside from its current level.
Additionally, for further insight in to the steel industry, find out how the steel war is heating up between giants US Steel and Arcelor Mittal and for further insight in to the iron ore space, here’s how Vale compares with Cleveland-Cliffs.
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