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Bear of the Day: ArcelorMittal (MT)

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Even with news of a mini stimulus from China, events haven’t been shaping up nicely for the steel industry. Demand for steel from key developed markets in North America and Europe haven’t picked back up leading to a glut in production.

And since many steel companies have huge fixed costs, this continued slump in demand has hit the industry pretty hard. Some have looked to make back some profits on volume, but heavy competition has kept a lid on prices, leading to the current rough patch for the industry.

While a number of firms have been impacted by these trends a good barometer of the overall space is ArcelorMittal (MT - Free Report) the world’s largest steel producer when looking at sales. MT is actually up significantly over the past 52 weeks, but its record in 2014 has been quite poor as it is down about 6% in the year-to-date time frame as concerns have begun to build again over the industry.

MT in Focus

MT is based in Luxembourg but it has a global reach, selling steel in more than 150 countries around the world. The firm is broken down into six divisions-- Flat Carbon Americas; Flat Carbon Europe; Long Carbon Americas and Europe; AACIS; Distribution Solutions; and Mining—with a broad focus on producing a variety of finished and semi-finished steel products for customers.

The company, while holding up in the past 52 weeks, still hasn’t recovered from the 2008 collapse, as shares are well below the peak set during the beginning of that year. The firm has also been posting horrendous numbers on the earnings front as well, suggesting that it is still working through some turbulence as it attempts to get back to profitability.

Recent Earnings

MT has missed estimates in three of its last four reports, including some pretty enormous gaps between what the Street was looking for, and what MT actually delivered. In fact, the average negative surprise for the past four quarters came in at -233%.

The most recent quarter saw a miss of about 93%, as MT reported a loss of 31 cents a share compared to analyst predictions of a loss of 16 cents per share. This performance was actually the second best one in the last four reports, and it continued the streak of unprofitability as well, suggesting that the momentum is certainly against this embattled steel company.

Earnings Estimates

Thanks to these trends, earnings estimates have been slumping for MT in both the current year and next year time frames. And though solid growth rates are projected, it is clear that MT has had trouble meeting estimates before so investors might want to temper their expectations.

This is especially true as the consensus estimate for the current year has fallen by about 7% in the past week, while the next year consensus estimate has tumbled by about 12.5% in the same time frame. It looks as if the bearish outlook is returning for MT, and that investors might want to avoid this stock until this trend turns around.

Due to this, we currently have a Zacks Rank #5 (Strong Sell) on MT and expect the recent slump to continue for the company. It is pretty hard to argue with its recent earnings, and with a report coming up in about a month, prudent investors might be better served by staying away from this stock until it can prove it has turned itself around.

Other Picks

Given the broad weakness in the steel industry, there aren’t really any favorable picks out there in this space. In fact, the industry is currently ranked in the bottom 10% of all industries, and at time of writing, not a single company has a Rank better than a #3 (Hold).

Due to this, investors will have to look to other segments for better plays in the broader materials sector. One segment that looks much better from an earnings estimate perspective is clearly the building products- wood industry which has a rank in the top 15%.

Two names that stand out in this segment are Universal Forest Products (UFPI - Free Report) and Weyerhaeuser (WY - Free Report) . Both of these companies have ‘Buy’ Ranks and a solid track record for beating earnings estimates, suggesting that either one could be a better play than the troubled ArcelorMittal at this time.

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