ArcelorMittal stock (NYSE: MT) has recovered by a formidable 157% since its March lows of 2020. This is much more than the 60% rise in the S&P 500. It is important to note that, the stock has rallied 40% in just the last two months following Cleveland-Cliffs’ decision to buy ArcelorMittal’s US operations. This deal will help MT reduce its debt burden and increase shareholder returns through repurchases. Despite such a healthy rise in the stock price from $7 in March 2020 to $18 currently, the stock is still slightly undervalued. However, we are unlikely to see a repeat of the recent rally anytime soon, with the stock expected to rise a little over 10% from here, considering the expected benefits of the deal with CLF and the projected recovery in the steel market. Our dashboard What Factors Drove -44% 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 the P/S (price-to-sales) multiple. This is despite a cumulative rise of 2.8% in revenues between 2017 and 2019, 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. This 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 in 2020 only to recover over recent months following the announcement of stimulus measures. The multiple currently stands close to 0.26x. The drop in P/S multiple in early 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 rise marginally from its current level, 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. There was some recovery in Q3 2020, where the company registered 20% y-o-y decline in revenues but 21% rise sequentially (compared to Q2 2020). This was mainly due to higher shipments and rise in price realization.
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 28th November 2020 was 70.6%, which is still lower than 78.8% 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 will see further upside in the near term. Additionally, plans to enhance shareholder returns with buybacks and projection of lower interest outgo bodes well for the stock. Though it will not replicate the recent rally, MT stock is likely to rise more than 10% from its current level of $18.
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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