ArcelorMittal: drop forged
Profitability is strong, but markets are worried about the outlook
Mr Market does not think much of ArcelorMittal. Benjamin Graham’s amusing analogy — of a nervy “business partner” — helped explain the unpredictable nature of bourses. ArcelorMittal’s underlying profits from steel have more than doubled since 2016. Its share price has hardly budged. Mr Graham appreciated cheap stocks, such as ArcelorMittal. Mr Market, less so. He worries about the outlook for steel.
That must puzzle Aditya Mittal, chief financial officer of the metals giant. Not only are earnings strong, profitability is too. Operating profit margins should reach 10 per cent this year, the best in a decade. Profits per tonne of steel jumped by nearly half in the first nine months over the previous period. According to Thursday’s third quarter update, the group has halved debt to $10.5bn in less than six years. With US interest rates rising, that should have soothed the nerves of Mr Market. Hardly.
ArcelorMittal’s valuation reflects continuing anxiety. Its enterprise value as a multiple of ebitda, the proxy for free cash flow, is at a depressed 3.5 times, near decade lows. If there are problems in the world steel market they have yet to appear. China’s “blue sky” initiative for cleaner air has forced production cuts on its dirtiest steel mills, especially in the winter months. As an indicator, reinforced bar prices — often from the most polluting plants — have risen smartly this year. On the other hand hot-rolled coil, sourced from more efficient mills, has fallen, notes Jefferies. Utilisation in the Chinese steel industry, more than half of world capacity, is at 12-year highs.
Less stinginess on the dividend might boost ArcelorMittal’s case. The shares yield a paltry 0.3 per cent. Cash flow instead will go to acquisitions: of Ilva in Italy and India’s Essar Steel. Mr Mittal has his own worries and would like to reduce net debt to $6bn before increasing payouts. His family is a big shareholder, of course.
Minority holders have a shorter time horizon. For those very confident in the outlook for steel, the shares look cheap. Most will take their cue from Mr Market.