ArcelorMittal: An Underappreciated Steel Giant with Significant Growth Potential

Is ArcelorMittal (NYSE:MT) overpriced at six times forward earnings? Not quite. This assessment changes dramatically when considering the company’s potential to more than double its current earnings within a few years.

Forecasting Revenue Growth

Analysts predict that ArcelorMittal can achieve a 14% revenue growth over the next four years, potentially adding $9 billion to its top line by 2028. For comparison, ArcelorMittal’s revenues surged by 45% between 2020 and 2022, driven largely by a steel and iron ore price boom as industries replenished their supplies. Currently, ArcelorMittal leads the steel production market in North America, Europe, and Brazil, while also tapping into high-growth markets like India and South America. However, it’s crucial to remember that metals stocks can exhibit significant volatility influenced by economic fundamentals and macroeconomic developments.

Streamlined Operations and Portfolio Expansion

ArcelorMittal’s improving EBITDA per ton reflects strong operational performance, increasing from $89 in 2012-2019 to around $133 in the first nine months of 2024. Although the market currently faces obstacles, ArcelorMittal’s profitability remains resilient due to ongoing investments and effective cost management. Moreover, the company has diversified its product offerings and geographical reach. In 2024, ArcelorMittal initiated three projects, including a hot strip mill in Mexico and a cold mill complex in Brazil, while also investing in renewable energy projects, such as a 1GW solar and wind initiative in India and Brazil. Notably, its debt level has significantly decreased from $15.7 billion in 2015 to approximately $6 billion today.

Doubling Earnings: Is It Feasible?

Indeed, the prospect of doubling earnings appears realistic when combining anticipated revenue growth with earnings improvements.

Market Expectations and Valuation Concerns

If earnings do double, the price-to-earnings (PE) ratio would drop to about 3, assuming stock prices remain constant. However, investors are banking on a scenario where the PE ratio stabilizes around 6, rather than decreasing. This stabilization could pave the way for ArcelorMittal’s stock price to potentially increase by 200-300%.

A Cautionary Note on Valuation

ArcelorMittal may currently be undervalued, but potential investors should consider risks such as capital expenditure plans, possible delays or budget overruns, challenges related to the ongoing situation in Ukraine, and new trade rules in North America.

Recent Stock Performance and Outlook

The stock performance over the past three years has been inconsistent and mirrors the volatility of the S&P 500. It delivered a return of 40% in 2021, fell 16% in 2022, and gained 10% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has outperformed the S&P 500 consistently during the same time frame.

Understanding Portfolio Performance

Why does this happen? The HQ Portfolio stocks have yielded better returns with reduced risk compared to the benchmark index. Given the current unpredictable macroeconomic landscape, characterized by interest rates and international tensions, analysts question whether MT will replicate its 2023 performance and possibly lag behind the S&P again in the next year, or experience a notable rebound.

What about a five-year outlook? The difference between a four-year or five-year timeline generally wouldn’t impact the anticipated revenue and margin growth trajectory for ArcelorMittal. The stock price would likely react similarly.

[1] Returns as of 12/11/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.