A Steel Stock That's a Steal

03/03/2009 9:09 am EST


Nick Lanyi

Editor, High-Yield International

Nick Lanyi, editor of High-Yield International, thinks global stimulus plans will also give a boost to the world's largest steel maker.

ArcelorMittal (NYSE: MT) is the world's largest steel producer, accounting for about 10% of global steel output.

The company makes steel products for sale around the world, but should benefit especially from the European stimulus plans as it is the leading supplier of steel for the continent's auto, construction, and household-products industries-direct beneficiaries of the stimulus plans.

To limit its vulnerability to price swings in the iron-ore and other raw-materials markets, ArcelorMittal has invested heavily in so-called "vertical integration"-owning iron-ore mines and other assets at every stage of its supply chain. The company also has a long-term contract with Vale (NYSE: RIO), the number-one iron-ore producer, to lock in supply.

ArcelorMittal's mills are considered the most efficient and profitable in the world. In general, economies of scale help ArcelorMittal keep its operating profit margins up.

ArcelorMittal was in the middle of a so-far successful strategy to become the world's dominant steel company when the economic slump hit. Not surprisingly, demand for steel has fallen. In the third quarter, the company's sales dropped 14%, and profit fell 17%. Fourth-quarter results are likely to be even worse.

However, the share price now discounts even a horrific recession. The stock now trades at less than five times analysts' lowered estimates for 2009 per-share earnings, which reflect a 40% to 50% drop in sales. Given the tremendous stimulus spending directed at ArcelorMittal's end-user base-infrastructure, automobiles, and household goods-I think it's a good bet that sales will exceed expectations.

As a market leader, ArcelorMittal should benefit once the recovery begins because dominant companies with low costs and high profit margins tend to make their way out of recessions in even stronger shape as they use their strengths to take market share from weaker competitors.

The company has a strong balance sheet, with debt only about a third of capitalization.

ArcelorMittal's valuation is attractive today. Europe's massive stimulus plans could help the steel producer exceed lowered expectations in 2009. Longer term, this is one of the best-positioned steel producers in the world to take advantage of rising demand from emerging markets.  

The company's management aims to maintain a quarterly dividend at around 30% of the prior year's annual net income. ArcelorMittal has said its 2009 dividend would be $.75, giving the stock a yield of 4.3% at Monday's closing price of $17.61. In 2008, ArcelorMittal paid four quarterly dividends of 37.5 cents [each], also for a total of $1.50.

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