Thursday, February 6, 2014

ArcelorMittal Doing More With Less

NEW YORK (TheStreet) -- For the past two-plus years, investors have been told they needed guts of steel to invest in the steel industry. Either that or they have to have first developed an extremely high frustration threshold.

ArcelorMittal (MT) investors have certainly been tested. But management has tried to put the pedal to the metal to deliver.

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Unlike commodity markets like aluminum and copper, where oversupply has become a legitimate concern, I've become a little less jittery about the future of steel. This is not because there are still no risks. I just don't believe the so-called "end times" for this industry is accurate, if not entirely exaggerated.

The recent results from AK Steel (AKS), for instance, demonstrated what is possible with competent management. The company went from posting a $230 million loss in one year to a fourth-quarter profit of more than $35 million last week. Clearly there are opportunities, if these companies know how to maximize value. In the case of ArcelorMittal, which has enjoyed a solid reputation as the premier name in integrated steel, the company has done more than a decent job overcoming to weak prices and slumping demand. Management has established a two-year plan to take out upwards of $3 billion in incremental costs in what the company calls a "cost optimization program." This is an initiative geared more towards variable cost reductions than fixed cost savings, which makes sense seeing as how unpredictable the steel industry has become. Since the start of this program, ArcelorMittal has posted better-than-expected results, particularly in from an EBITDA perspective, which stands for earnings before interest, taxes, depreciation and amortization. EBITDA is the standard metric used to measure performance in the steel industry. It's true EBITDA is still lower than the company's historical standard, but it has steadily risen over the past couple of quarters and has met estimates. Plus, investors continue to discount that these operational improvements coincide with sequential increases in steel shipments.

Stock quotes in this article: MT, AKS 

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All told, ArcelorMittal management continues to do more with less. And whether the Street wants to give this company the credit it deserves, the company's restructuring efforts are beginning to pay dividends. And investors who want to house their faith in steel should look at this company a little bit closer.

ArcelorMittal will report its fourth-quarter and full-year earnings results on Friday. Given the dire state of the industry, not much is expected this quarter. In fact, analysts aren't projecting a profit at all. The company is projected to report earnings of $0.00. That's not a typo. And that's good news. It would reverse a year-ago loss of $2.58 per share.

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Revenue, on the other hand, is projected to be up slightly above 4% year over year to $20.1 billion. While this does support the notion that steel demand has picked up, the more interesting aspect of the report will the extent to which management has benefited from higher ASPs (average selling prices). AK Steel just reported a 2% year-over-year increase, measuring at $1,031 per ton.

And this is where ArcelorMittal's heavy exposure to Europe and North America, which accounts for more than 60% of its revenue, should serve as a benefit. Brazil, where the company also has a large presence, will be a factor. In past reports, management cited Europe, in particular, as a having been a major growth obstacle due to weak shipments and slumping prices in raw materials. The extent to which these regions are able to rebound will determine the stock's near-term trend. But don't hold your breath. Management's guidance for the year will dictate the level of confidence they have in any potential recovery and where this company is heading. For now, with earnings expected to come in at zero, investors should (at least) take solace in the fact that the worst is finally over and there's no longer an issue of decelerating growth. The thing to remember here is that even though ArcelorMittal's production and profitability are still not back to historical levels, these shares are nonetheless attractive at around $16 a share on the basis of growing steel demand and higher APS. At the time of publication, the author held no position in any of the stocks mentioned. Follow @saintssense This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: MT, AKS 

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