Price versus value
The age old rule of making money in the markets has been to buy low and sell high. The rule sounds simple only if one could keep a check on emotions and stick to fundamentals. Looking at ArcelorMittal there are a lot of roadblocks in the industry it operates in. We’ve discussed ArcelorMittal’s business aspects. Now we’ll analyze its valuation compared to its peers.
Receive e-mail alerts for new research on MT:
Interested in MT?
Don’t miss the next report.
Which metric should be used for ArcelorMittal?
There are plenty of valuation metrics available. However, to value a cyclical and heavy capex industry like steel, enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) is probably more appropriate. The reasoning is that EBITDA figures are more sanitized and less prone to manipulation through innovative accounting techniques. Although investors have a liking for the price-earnings (or PE) ratio as a valuation tool, for a cyclical industry the earnings can go haywire with the business cycles. A negative earning basically makes the PE ratio redundant.
Why the market has been cold to ArcelorMittal stock
If you look at the previous chart, ArcelorMittal has the lowest forward EV to EBITDA multiple when compared to other U.S. listed peers like United States Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS). It’s probably because of bottlenecks in its European operations. By looking at this ratio, one could argue that a visible recovery in Europe and ArcelorMittal (MT) focusing on cost rationalization still hasn’t been fully discounted by the markets. It’s because of the inherent risks involved in future projections and a reflection of analysts’ confidence in ArcelorMittal. It’s important note that ArcelorMittal has been regularly missing the analysts forecast of earnings over the past few quarters.
Apart from investing in individual stocks, an investor can also consider investing in exchange-traded-funds (or ETF’s) like the SPDR S&P Metals and Mining ETF (XME). An ETF provides the much desired diversification to your portfolio.