ArcelorMittal Likely Approaching The Bottom
Oct. 8, 2019 8:15 AM ET | About: ArcelorMittal (MT), Includes: NUE, STLD
Stephen Simpson, CFA
Long only, growth at reasonable price, value, research analyst
Kratisto Investing
(10,556 followers)
Summary
Steel prices have continued to weaken, demand volume is not robust, and input prices are pushing margins to multiyear lows.
The second half of 2019 should see a bottom in ArcelorMittal's per-tonne EBITDA, and self-help should kick in starting in 2020.
Steel demand is still vulnerable to further macroeconomic weakness, but ArcelorMittal's valuation seems to price in a lot of pessimism.
It’s been a pretty brutal year for steel stocks, as even protectionist policies in the U.S. and EU haven’t done much to shore up weaker pricing and demand. I’ve been pretty negative on most of these stocks, though my basic thesis of “own good names like Steel Dynamics (STLD) and Nucor (NUE) if you have to own something” has played out, as those two companies have done less worse than ArcelorMittal (MT) thus far this year.
The flip side of owning better companies in tougher times is considering worse companies when conditions start to bottom out. Although I expect ArcelorMittal to report a pretty ugly third quarter, and I don’t think the fourth quarter will be all that much better, I think ArcelorMittal’s business may be bottoming out now. To that end, I believe this global steel giant could see double-digit EBITDA growth in 2019 and solid single-digit growth in 2020 and 2021, although the risk of recession in both North America and Europe is still a significant risk factor.
I don’t have enough confidence in ArcelorMittal to call this a must-buy, but I like the company’s asset sale plans (vague as they are), the ongoing emphasize on price and margin over volume, and the potential uplift from improvements at newly-acquired Ilva. At this point, I believe ArcelorMittal shares should trade closer to $20, and this is a name for more aggressive contrarians to consider.
Steel Prices Fading
I’ve been generally bearish on steel prices all year, and with U.S. hot-rolled coil prices down 26% year to date, I’m not exactly regretting that position. I thought North American producers like ArcelorMittal, Nucor, and Steel Dynamics would have a hard time passing through and holding the price increases they announced at the start of the summer, and the results there have been mixed.
Although some of the price boost has held up (U.S. hot-rolled prices are up about 9% over the past three months), prices have been eroding more recently (a mid-single-digit decline since early September), and both Nucor and Steel Dynamics announced lower third quarter targets (relative to average sell-side estimates) with their mid-September updates, and both blamed weaker pricing in part for the miss.
Capacity utilization in the U.S. has been fairly healthy (around 80%), but demand has been fading; companies like Nucor have continued to reaffirm healthy trends in non-residential construction, but markets like autos, heavy machinery, heavy manufacturing, and so on have been weakening.
As a global steel company that generates a little under half its revenue from Europe, North America is only part of the puzzle for ArcelorMittal. Unfortunately, the European piece isn’t looking any better. Hot-rolled prices are down about 17% year to date in Germany, and the trend has been weakening at an accelerating pace here lately. Plate steel, typically one of the highest-value non-treated steel types, has also been weakening, albeit not at quite the same pace as in the U.S. (a negative development for Nucor). With key European economies like Germany looking weaker, I’m not too confident about the near-term demand trends, and I don’t think the recent changes to EU quotas are going to do much more than offset the macro weakness.