February 8, 2011
ArcelorMittal (ticker: MT) is in the news today after reporting fourth quarter and full year 2010 earnings. The world’s largest steel producer announced a $780 million loss for the fourth quarter of 2010, but stated that “slow and progressive” demand is picking up and forecasting 7% growth in steel consumption in China and Europe and 10% growth in U.S. steel consumption in 2011. Higher raw material costs caused the quarterly loss, but sales rose 19% to $20.7 billion in Q4 2010 from $17.4 billion in Q4 2009.
ArcelorMittal sees “slow and progressive” demand
picking up for global steel producers.
During the fourth quarter, ArcelorMittal, along with Nunavut Iron Ore, jointly acquired more than 90% of Baffinland Iron Mines Corporation in Canada. MT also spun-off of its stainless steel operations, which caused a $547 million charge and is now considered a discontinued operation.
I became interested in the stock after reading about the spin-off of the stainless steel division. Hedge fund manager and author Joel Greenblatt’s book How to Be a Stock Market Genius highlights the opportunity in event-related investing. A spin-off is a binary event and falls under Greenblatt’s favored style of investment.
In researching the stock before making an investment, I looked at the investment chart over the past five years.
Five year chart of ArcelorMittal stock
Chart from Yahoo! Finance: http://finance.yahoo.com/q/bc?s=MT&t=5y
Like most stocks, 2008 and 2009 were difficult years and MT’s price fell dramatically. However, many commodity-related stocks have rebounded over the past two years to all time highs. In 2010, crude oil prices rose 17.3%, sugar rose 25.5%, and wheat rose 49.3%. MT has not had a similar recovery and the stock trades in the $35-40 range, around where it traded in 2006.
History and management of ArcelorMittal
ArcelorMittal began as LNM Group in 1976, then became Mittal Steel in 1989. Mittal was founded by Lakshmi Mittal, 60, who is the Chairman and Chief Executive Officer and currently the richest man in Europe and the fifth richest person in the world. Mittal grew up in Rajasthan, India, the son of a successful steelmaker. His family business largely consisted of local steel plants and in 1976, Mittal built the international division of the company. He founded LNM Group after separating from the family business in the mid-1970s and the family business is now managed by Mittal’s two brothers.
The company was founded by Lakshmi Mittal,
currently the richest man in Europe
and the fifth richest person in the world.
Mittal has two children, and his son Aditya, 34, joined Mittal Steel in 1997 after graduating from the University of Pennsylvania’s Wharton School and working for Credit Suisse First Boston. Aditya became head of Mergers & Acquistions in 1999 and is currently the Chief Financial Officer of ArcelorMittal.
From its founding, Mittal’s growth strategy was to acquire steel manufacturers all over the world, and some of the early acquisitions included companies in the United States, France, South Africa, China and Canada. Arcelor was created in 2002 from the combination of three steel companies and became the world’s second largest steel producer. Mittal acquired Arcelor in 2006 and with the acquisition, ArcelorMittal became the world’s largest steel producer. MT continued its acquisitive path in 2007, completing 35 transactions globally.
Mittal acquired Arcelor in 2006, and ArcelorMittal
became the world’s largest steel producer.
MT employs over 260,000 people in 60 countries. The company’s product offerings include both finished and unfinished steel, and flat and long products. Flat products include steel sheets and plates, and long products include bars, rods and other structures. MT provides products to the appliance, automotive, construction, energy, public works and packaging industries.
MT’s website reports that in 2010, the company had revenues of $78 billion and crude steel production of 90.6 million tons, representing approximately 6% of world steel output. As of February 8, 2011, the company’s market capitalization was just over $56 billion.
The Cycle of Steel
The booming economy of the mid-2000s and increased construction globally brought steady profits to the steel industry, however steel producers began to suffer in 2008 as demand slowed and supply increased. ArcelorMittal was no exception. Steel prices fell dramatically in late 2008 after a strong run up in price and have not recovered to 2008 highs. The company’s operating margins fell, it pulled back from making acquisitions and sharply reduced its capital expenditures for anything other than maintaining current businesses.
Steel prices fell dramatically in late 2008
and have still not recovered.
Since the massive drop in steel prices, manufacturers have struggled with the increased cost of raw materials as commodity prices rose while steel demand stayed low. The key raw materials needed to make steel are iron ore, coal, limestone and recycled steel. Mittal’s earnings and the comments from its management team are signs that higher margins for steel producers are likely, as companies who struggled during the recession are becoming more able to pass higher costs on to customers.
Five year chart of Steel Index ETF
Chart from Yahoo! Finance: http://finance.yahoo.com/q/bc?s=SLX&t=5y&l=on&z=l&q=l&c=
The company’s financial operations are broken into three main categories: Iron Ore Production, Crude Steel Production and Steel Shipments.
ArcelorMittal’s 2010 iron ore production increased 23% year over year, and the joint purchase of Baffinland Iron Mines Corporation is indicative of MT’s desire to reduce its reliance on mining companies. Lakshmi Mittal stated that the company plans to spend $5-7 billion to expand the iron ore Baffinland project and expects to increase its own iron ore production by 10% in 2011.
ArcelorMittal has expressed a desire
to reduce its reliance on mining companies.
The World Steel Association reports that since 2003, global iron ore demand has risen at a rate of up to 12% every year, mainly due to the increase in China’s consumption. No other country has that level of demand, and overall global consumption is expected to increase by approximately 5% per year.
Mittal said the company would like to continue to increase its ownership of natural resources, especially coal. Coal is a key raw material in steel production. Carburized coal, or Coke, which has been heated without oxygen at high temperatures, allows iron ore to be reduced to usable hot metal.
ArcelorMittal wants to own more
raw materials, especially coal.
Crude steel production globally rose to 15% in 2010, to 1.4 billion tons, which is a new record for production, according to the World Steel Association. ArcelorMittal’s production grew 21% in 2010, reflecting the increased global demand.
MT’s steel shipments increased 18% in 2010, and the company stated the increase is due to margin recovery as well as higher shipments as the global steel markets recover.
2011 Outlook & Stock information
While MT’s stock performance is clearly tied to global demand for steel, the company has shown itself to be an adept manager of growth and acquisitions. With a $5 billion budget for capital expenditures in 2011, $1.4 billion of which is earmarked for mining, MT is back to growing its businesses and seeking out new ways to control its dependence on market forces. Management is clearly seeing improvement in 2011 and strong demand from China is likely to continue.
The company is growing its businesses
and seeking new ways to
control its dependence on market forces.
Over the past five years, MT stock has been volatile, trading from a high of $101.56 to a low of $17.82. In the past year, the stock traded to a high of $46.95 and a low of $26.64. For the past six months, the stock has traded steadily higher and currently trades at approximately $37 per share, or 14x 2011 earnings. MT has vastly underperformed the S&P 500, as shown in the one year chart below. The line showing MT’s stock is blue and the S&P is green.
One year chart of ArcelorMittal stock and S&P 500 Index
Chart from Yahoo! Finance: http://finance.yahoo.com/q/bc?s=MT&t=1y&l=on&z=l&q=l&c=^GSPC
Standard & Poors reports that historically, the S&P 500 price to earnings median ratio is 15.7x. Currently, the S&P 500 trades at approximately a 23x price to earnings ratio. MT looks cheap compared to the market and has not participated in the strong rally of the past two years.
The stock is attractively priced
and has a 2% dividend.
MT announced it will pay quarterly dividends in 2011 of $0.1875 per share, approximately a 2% yield. It is difficult to find a savings account that pays higher than 1%, and ArcelorMittal offers an attractive yield on a stock that feels poised to head higher.
Sources:
http://www.equipmentworld.com/u-s-steel-shipments-down-7-2-percent/
http://www.ft.com/cms/s/0/1ae1ef48-3361-11e0-a388-00144feabdc0.html#axzz1DUxECrEO
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