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We retained our Underperform recommendation on steel bellwether ArcelorMittal (MT - Analyst Report) following its lackluster fourth-quarter 2012 results. Our view reflects the weak steel pricing environment and softness across end markets.

Why Maintained?

ArcelorMittal posted a bigger loss in the fourth quarter, reported on Feb 6, hurt by hefty goodwill impairment charges. Both revenues and adjusted loss per share missed the Zacks Consensus Estimates.

ArcelorMittal’s top line went down 14% in the fourth quarter as it had to contend with difficult economic environment, especially in its biggest market Europe. The company expects the weaker demand environment to sustain in the near and medium term.

ArcelorMittal remains affected by the challenging economic conditions in Europe. It is also exposed to volatility in steel pricing and tough competition and has significant debt which is almost equal to its market capitalization.

Increased domestic imports, production ramp ups by peers and increased Chinese production have led to oversupply in the industry, which in turn caused a drop in steel prices. The effect of price declines was witnessed across all segments in the fourth quarter and led to a contraction in the top line.

Moreover, demand for steel remains weak. The world economy is struggling and the recessionary conditions persist in Europe. Moreover, China’s economy remains somewhat sluggish and there is a demand-supply gap in the U.S. Weak construction activity in the U.S. and Europe remains another concern. Weakness in key end markets may hinder ArcelorMittal’s earnings power moving ahead.

Also, ArcelorMittal is saddled with high debt. Although the company is diligently working toward reducing the amount of debt on its books through divestments, a net debt of roughly $21.8 billion against a market capitalization of around $22.5 billion is concerning.

ArcelorMittal currently retains a Zacks Rank #5 (Strong Sell).

Other Stocks to Consider

Other steel producers having a favorable Zacks Rank are Companhia Siderurgica Nacional (SID - Analyst Report), Kobe Steel Ltd. (KBSTY) and Gibraltar Industries Inc. (ROCK - Analyst Report). All of them hold a Zacks Rank #2 (Buy).

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