This Steel Maker Is Looking to Defy a Recession. That Could Drive the Stock Higher.
Manufacturers are a bellwether for global economic health—when demand slumps, so does production.
ArcelorMittal , the world’s second-largest steel maker by volume, with facilities in 16 countries on five continents, has faced severe headwinds the past year as the cost-of-living crisis caused consumers to rein in spending. In addition, the company has had to navigate Covid-19 lockdowns in China, which caused companies to scale back production.
The stock (ticker: MT.Netherlands) has fallen 8.6% to 28.90 euros ($31.25) over the past 12 months, and the prospect of a recession in 2023 will make it a tough year. But this could prove to be a buying opportunity because ArcelorMittal is using its scale, its geographical spread, and its focus on growth markets to defy the odds.
Access to gas to power factories and offices is a key issue. And while Russia’s war in Ukraine hit gas supplies in Europe, ArcelorMittal has facilities spread across eight countries, which mitigates this impact. Energy is a big overhead, but prices have fallen and the steel maker stands to benefit because it had the foresight to not hedge its energy costs in the fourth quarter.
The business will also have the advantage of a series of self-help measures. During its third-quarter update, it said it had cut gas consumption in Europe by 30% and is also scaling back production.
It has shut down six megatonnes of capacity, or 15% of its total capacity, in Europe, according to a recent note by ODDO BHF analyst Maxime Kogge, who remains an ArcelorMittal bull but has scaled back forecasts for projected earnings before interest, taxes, depreciation, and amortization, or Ebitda, to $6.6 billion from $8.2 billion for 2023.
He is sticking with an Outperform rating on the stock, which he estimates could rise 25% to €35. The recovery is likely to come earlier in Europe, where market prices “have probably bottomed out,” he says.
He added that “the group’s solid fundamentals are unchanged,” and noted its strong cash generation and high level of returns to shareholders.
Deutsche Bank’s Bastian Synagowitz has a price target of €32.23, writing in a recent note, “ArcelorMittal holds potential for a strong rebound once steel markets bottom out, and although volatility is likely to remain elevated, we reiterate Buy.”
The company, which is a large supplier to the automotive industry, accounting for 12% of sales, has a market value of €23 billion and employs 157,909 workers. It fetches a multiple of 8.8 times this year’s expected earnings and is valued in line with its peers.
For the half year through June 2022, Ebitda jumped to $10.2 billion from $8.3 billion for the same period the year before. Sales in the period also increased, to $44 billion from $35.5 billion.
“The short-term outlook for the industry remains uncertain and caution is appropriate,” CEO Aditya Mittal tells Barron’s. The company has a strong balance sheet, he adds, and “we will continue to focus on executing our strategy, designed to ensure our long-term sector leadership, as well as deliver sustainable investor returns.”
Arcelor’s Kryvyi Rih plant in Ukraine has been affected by Russia’s war. It resumed producing some crude steel in April. There was a setback in December after it was shelled, but damage was minimal.
More solid upside could come from ArcelorMittal’s mining arm. While this isn’t a core business, only contributing 13.3% of group Ebitda, the price of iron has bounced back. “Mining should prove more resilient,” Kogge says.