The rally in U.S. Steel’s share price
Let’s begin by analyzing the rally in the share price of U.S. Steel (X) over the past year. The share price has more than doubled, including a 20% move up on the day it declared its second quarter results for 2014. You can read more about U.S. Steel here.
U.S. Steel has almost identical problems as ArcelorMittal. Both had production through blast furnace routes, had high leverage ratios, and had their own iron ore mining. We discussed these as the key issues that are plaguing ArcelorMittal today.
The valuation gap for ArcelorMittal
The chart above shows the trailing enterprise value to earnings before interest, depreciation, amortization, and taxes (or EV/EBITDA) for leading steel companies. As you can see, ArcelorMittal trades at the lowest multiples among its peer group. Until last year, U.S. Steel had similar multiples compared to ArcelorMittal.
We saw previously how steel stocks have rallied in the past couple of years. Since ArcelorMittal’s stock has been stagnant, its valuation gap with other steel companies like Nucor (NUE) and Steel Dynamics (STLD) has also increased. These companies form the investment universe for the SPDR S&P Metals and Mining ETF (XME).
The valuation gap has been due to the issues surrounding ArcelorMittal, as we’ve seen. We also discussed how the outlook looks positive for the company. These factors led to UBS revising its rating on ArcelorMittal to buy, with a price target of $19. This rating represents a 35% upside from the current levels.
These turnarounds aren’t uncommon in the steel industry, as U.S. Steel has shown. If market conditions continue to improve for ArcelorMittal, as expected, investors can expect their investment in ArcelorMittal to finally deliver returns. You can read more about various themes developing in the steel industry here.