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ArcelorMittal Retains Neutral Rec

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On Nov 26, we reiterated our Neutral recommendation on steel giant ArcelorMittal (MT - Free Report) . While we are impressed by growth opportunities arising from emerging markets and the company’s efforts to cut debt and reduce costs, we remain on the sidelines considering weak steel industry fundamentals and the tough pricing environment.

Why Retained?

ArcelorMittal posted narrower loss in the third quarter of 2013, reported on Nov 7, helped by its cost reduction measures. Adjusted loss was below the Zacks Consensus Estimate. Revenues fell modestly but beat expectations. Shipments rose on a year over year basis in the quarter.

ArcelorMittal, a Zacks Rank #3 (Hold) stock, is expanding its steel-making capacity and raw materials self-sufficiency through a combination of brownfield growth, new greenfield projects and acquisition opportunities, mainly in emerging markets.

ArcelorMittal is also highly focused on reducing debt, lowering costs and improving efficiency. The company maintains its $15 billion medium-term net debt target. On the cost-saving front, ArcelorMittal is progressing with a new $3 billion cost optimization program that mostly focuses on variable cost reductions in its plants.

We are also encouraged by the company’s expansion initiatives in the mining segment. ArcelorMittal is progressing with its mining growth projects and is on track to boost iron ore production capacity in its own mines to 84 million tons by 2015 from 56 million tons in 2012. A second phase expansion in its operations in Liberia is currently underway.

However, ArcelorMittal remains affected by the challenging economic conditions in Europe. It is also exposed to volatility in steel pricing and tough competition.

Increased domestic imports, production ramp ups by peers and increased Chinese production have led to oversupply in the industry, which in turn, is causing a decline in steel prices. The effect of price declines was witnessed across all segments in the third quarter.

Moreover, demand for steel remains weak. Steel demand is currently roughly 30% below pre-crisis levels in Europe. ArcelorMittal has closed some its operations in the region, given slack demand and the weak European economy. In addition, effects of sequestration and the recent government shutdown are impacting demand in the U.S.

Other Stocks to Consider

Other companies in the steel and related industries with favorable Zacks Rank are Companhia Siderurgica Nacional (SID - Free Report) , NSK Ltd. and United States Steel Corp. (X - Free Report) . While both Companhia Siderurgica and NSK hold a Zacks Rank #1 (Strong Buy), United States Steel retains a Zacks Rank #2 (Buy).

In-Depth Zacks Research for the Tickers Above

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National Steel Company (SID) - free report >>

United States Steel Corporation (X) - free report >>

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