MT - ArcelorMittal: A Solid Steel Play That Simple

2023-09-21 09:32:49 ET

Summary

• ArcelorMittal is a global powerhouse in the steel industry, with a market cap of over $21 billion.
• MT is well-positioned to capitalize on global trends, such as increased construction expenditures driving steel demand.
• The company has shown strong financial performance, with declining net debts, increasing shareholder value, and record-breaking earnings in 2021.

Investment Rundown

The steel industry may not be the most exciting in the markets right now, it's not nearly as broadly covered as AI, for example. But that isn't to say there aren't some very good deals in this market currently. ArcelorMittal S.A. ( MT ) is a large company and player in the steel industry, operating as both a producer and miner of steel right now. The reach is global and has made it into the behemoth that it is today, spanning a market cap of over $21 billion.

The last report showcased the company having some trouble getting shipments up as the pricing environment has become less favorable for it. I think however that prices are likely to return higher as interest rates go down, not only in the US but around the world and construction projects become more appealing and rewarding for companies and governments. This should add some fuel to steel prices and drive higher earnings for MT. I like the price point and will be rating it a buy for now.

Company Segments

MT stands as a global powerhouse in the steel manufacturing industry. As the second-largest steel producer worldwide, the company achieved a remarkable feat in 2022 with an annual production of 88 million tonnes of crude steel and revenues nearing the $79.84 billion mark. This impressive scale and financial prowess position MT at the forefront of the steel industry, ready to tackle new opportunities and challenges on a global scale.

MT is a highly vertically integrated company that encompasses the entire spectrum of the steel industry. Its operations span from cutting-edge research and development to mining, manufacturing, and distribution of steel products. The company is well-poised to capitalize on major global trends, such as the substantial increase in construction expenditures, which are driving the demand for steel across the world. With its diverse capabilities and alignment with these megatrends, MT is a compelling player in the steel industry.

The balance sheet is a key point to watch with MT as it helps gauge the potential they have for growing and expanding. As we can see above, they have done a fantastic job at bringing down the net debts and growing into a more flexible financial position as a result. The interest costs are declining steadily as a result, leaving more earnings available for distribution by the company. MT has been able to deliver a strong shareholder return thanks to the buyback programs they have begun. Since just 2020 the outstanding shares have declined by around 30%. This has ensured strong shareholder value and, in my opinion, is the reason for the continued uptrend the share price has been on recently as well.

Markets They Are In

The steel market has been quite volatile over the last few years, and this has of course affected the earnings of companies like MT. In 2021 the earnings exceeded $14 billion, the highest in the company's history. This enabled them to buy back significant amounts of shares and also pay down debt and end up in a better financial position as well.

The company continues to note though that the activity in the industry remains quite lackluster and poor. But what is fundamentally going to drive demand in the medium to long term at least I think is the low inventory levels that companies have. The real demand for the first half of 2023 remains stable, and that is really what anyone could have asked for, in my opinion. The war in Ukraine has made commodities markets around the world quite volatile, and rising interest rates have softened demand somewhat as well. If we see a rise in the shipments for MT further, I think that is a good indication of trends reversing, and we are heading for higher earnings.

Risks

The steel industry is closely tied to key sectors like automotive, engineering, and construction. However, these sectors are currently grappling with significant macroeconomic uncertainties that have the potential to dampen demand. Factors such as ongoing global trade tensions, evolving government policies, and geopolitical events are casting a shadow over these industries. These uncertainties are not only affecting steel manufacturers but also posing challenges for the entire supply chain. The steel industry must navigate this complex landscape and adapt to changing market conditions to ensure its sustainability and growth.

MT currently boasts a formidable position, which I believe is quite robust. With a market capitalization exceeding $21 billion, they stand among the industry's giants. Capitalizing on this strength will play a pivotal role in their efforts to expand and enhance both their revenue and profitability. In an ever-evolving market landscape, leveraging their substantial market cap can open up promising avenues for future growth and success. The recent downturn in prices seems to have made the shipments for MT slightly lower as well, and they await better prices and a great opportunity to benefit from a more positive pricing environment.

Industry Comparison

In comparison to a peer like Steel Dynamics, Inc. (STLD), I think that MT looks like the better option right now. The sheer market position that MT holds is one thing, but valuation looks to offer a better immediate upside potential.

The p/e for MT is just under 5 on an FWD basis, far under the sector median of 14. Now, steel companies tend to get a lower multiple as a result of the volatile prices that can occur, making resilient earnings very difficult.

On the side of STLD, I think the multiple is not that appealing, the p/e is at 6.5 on an FWD basis and doesn't offer the same immediate discount that MT has. Now, I think that the reason that the market may be pricing STLD like this comes from higher growth estimates, but I would argue there is more shareholder with MT as they have an extensive history of buying back shares, at least at a rate faster than STLD.

Final Words

The steel industry has been quite tumultuous the last few quarters, but the steel prices seem to finally be finding their footing and heading higher now. I think that MT displays a very good investment opportunity right now as the company is trading at a discount and has a good track record of delivering shareholder value. I like the business, and megatrends like increased industry spending are going to drive demand. Rating MT a buy.

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