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Why ArcelorMittal (MT) is the Best Steel Stock Bet Today?

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ArcelorMittal (MT - Free Report) – the biggest steel producer on the planet – has staged a remarkable comeback in the recent months after starting 2016 on a weak note, thanks to improving steel market conditions and the company’s internal initiatives.

The Luxembourg-based steel behemoth is having an impressive run of late. The company has seen its shares catapult roughly 85% so far this year. The stock is also up around 31% over the last three months.

ArcelorMittal delivered solid results in second-quarter 2016. The company saw its profits skyrocket more than six-fold year over year to roughly $1.1 billion or 38 cents per share in the quarter, aided by a one-time gain on employee benefits associated with the signing of a new U.S. labor contract and its cost-saving actions. Earnings per share also topped expectations.

The company, in its second-quarter call, said that it will remain focused on implementing strategic measures, especially Action 2020, to drive profitability. It backed its EBITDA outlook for 2016 and expects it to be more than $4.5 billion. Notwithstanding a decline in sales, the company’s EBITDA jumped roughly 27% year over year to around $1.8 billion in the second quarter.

The Action 2020 plan, a strategic roadmap for each of the company’s key segments, targets a structural EBITDA improvement of about $3 billion. Upon full achievement of the plan, the company expects to deliver free cash flow of more than $2 billion annually.

Steel market conditions have improved lately, driven by favorable developments on steel trade cases across the U.S. and Europe in the recent past, providing some reprieve to steel producers including ArcelorMittal, U.S. Steel (X - Free Report) , Nucor (NUE - Free Report) , AK Steel and Steel Dynamics (STLD - Free Report) . Steel prices also recovered during the second quarter, helped by punitive trade actions that led to levy of tariffs on imports. While ArcelorMittal should gain from an improved steel pricing environment, a recovery in iron ore prices should also support its mining business moving ahead.

However, China, which has built up a massive excess steel capacity, is still causing problems. China’s steel exports jumped 9% year over year to 57.12 million tons in the first six months of 2016 (per data released by the General Administration of Customs), signaling continued demand weakness at home.

ArcelorMittal remains highly focused on reducing debt, lowering costs and improving efficiency amid the prevailing operating backdrop. The company also remains committed to divest its non-core assets and increase focus on important operations.

ArcelorMittal, in Apr 2016, successfully completed its $3 billion rights issue. The company is using the proceeds from the right issue and the sale of its minority stake in automotive metals component company Gestamp to pare debt and strengthen its balance sheet. The company’s net debt declined by $4.6 billion in the second quarter to $12.7 billion.

The company also remains on track with its cost reduction actions. Iron ore unit cash costs declined 20% in 2015, exceeding the company’s goal of a 15% reduction for the year. ArcelorMittal expects to cut unit cash costs by more than 10% year over year in 2016. The company also expects cash savings of more than $1 billion in 2016, partly due to lower capital spending and reduced interest expenses resulting from debt cuts. These moves are expected to lead to better operational performance in the long run.

ArcelorMittal has also seen strong earnings estimate revision activity over the past two months, suggesting analysts are becoming more bullish on the firm’s prospects in both the short and long term. The Zacks Consensus Estimate for 2016 has shot up roughly 194% over the last 60 days. Moreover, the Zacks Consensus Estimate for 2017 has risen roughly 73% over the same period.  This has helped ArcelorMittal to earn a Zacks Rank #1 (Strong Buy), further underscoring the company’s solid position.

In fact, ArcelorMittal is currently the only company in the steel space with a Zacks Rank #1 and a VGM Score of “A”, making it an intriguing choice for investors right now.

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