The modern steel industry got its start back in the 1850s and
took off after the American Civil War, just as the U.S. and
global economies took off. Many great fortunes were made in the
What's more is that to this day there is no effective
alternative for steel. The biggest fortune created from steel was
that of Andrew Carnegie, who famously gave away all his money to
charities after his death.
Today, the modern Andrew Carnegie is Lakshmi Mittal, an Indian
steel magnate. Through a series of acquisitions, he built his
family's steel business into the world's largest steel company:
This company is now the best play on the global economy, since
steel is used in so many industries and products, from
automobiles in Detroit to skyscrapers in China.
Steel demand is everywhere -- and so is ArcelorMittal.
Mittal and his family are ArcelorMittal's largest
shareholders, with a 38% stake in the company. The fact that the
family has a vested interest in the strength of the company ought
to provide a margin of comfort to investors. Over the past few
years, ArcelorMittal has been focused on reducing costs and
becoming a more cost-efficient operator.
ArcelorMittal has been aggressive over the last few years when
it comes to cost cutting and reducing overcapacity. Thanks to a
rebounding economy and aligning of costs, ArcelorMittal's
earnings before interest, taxes, depreciation and amortization
(EBITDA) is expected to jump to $8 billion this year, up from
$6.9 billion in 2013.
As a global player in steel, ArcelorMittal is poised to
benefit from strong demand in North America, Europe and Asia. The
company is vertically integrated: It owns mines that produce iron
ore and coal, which are required for the production of steel. Its
mining business gives it advantages over other steel makers when
it comes to cost savings and revenue-generating
Based in Luxembourg, ArcelorMittal is also expanding in
various countries. In Canada, it is increasing capacity to
capture a larger part of the auto steel market. It also recently
acquired a plant in Alabama for $1.6 billion, which will boost
ArcelorMittal's supply capabilities to the energy and auto
industry in the Southeast. The company is also boosting capacity
in Brazil, which accounts for 20% of its revenue, in an effort to
gain more exposure to the country's growing demand for steel used
One concern after its acquisition spree is ArcelorMittal's
relatively high level. However, the company has been paying down
that debt: At the end of last year, its debt was down to $16.1
billion, its lowest level since 2006. Debt at the end of this
year is expected to be $15 billion.
ArcelorMittal trades at an enterprise value-to-EBITDA ratio of
6.3. Compare that with
U.S. Steel (NYSE:
Steel Dynamics (Nasdaq:
, which trade at 7.3 and 9.5, respectively. Shares of
ArcelorMittal also pay a 1.1% dividend yield.
As well, shares of ArcelorMittal are incredibly cheap when
evaluated by other multiples. It trades at a forward
price-to-earnings (P/E) ratio of only 10 times expected earnings,
a price-to-sales multiple of 0.3 and price-to-book ratio of just
0.5. Shares also have a P/E-to-growth (
) ratio of only 0.5.
ArcelorMittal's stock is well below the high of almost $90 a
share just before the financial crisis hit in 2008. With the help
of a rebounding global economy, a stronger balance sheet and cost
cuts, ArcelorMittal could be well on its way back toward those
Risks to Consider:
ArcelorMittal has significant exposure to emerging markets,
which are often more volatile than developed markets. As the
largest steel company, ArcelorMittal also relies heavily on the
broader economy. Any delay in an economic recovery could have a
negative impact on the company's revenue growth.
Action to Take -->
MT is trading well below its major peers. A valuation more in
line with its peers would give it a price target of $30, which
represents 100% upside from current levels. This might take a
couple of years, but will put shares trading back to 2011