ArcelorMittal Stock Could Touch $70

ArcelorMittal (NYSE:MT) pricey at six times forward earnings in the coming years? Not at all. Especially if you consider the fact that the company’s earnings could be more than double the current level in the next few years.

How is that? We believe that ArcelorMittal can grow its top line by 14% in the next four years – implying that its revenues could grow by $9 billion by 2028. For context, ArcelorMittal revenues grew 45% between 2020-2022, primarily aided by a solid rally through 2021 on account of rising steel and iron ore prices, as well as restocking across the industry. ArcelorMittal is the largest steel producer in North America, Europe, and Brazil with exposure to high growth markets like India and South America. Metals stocks can be volatile, however, moved by fundamentals as well as macro events. As an aside, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Combine revenue growth with the fact that ArcelorMittal’s EBITDA/ton is on an improving trajectory – it grew from $89/ton during 2012-19, to about $133/ton in the first nine months of 2024. Operating profits per ton were higher through 2021 to 2023 due to the strong iron and steel prices. Despite the current challenging market conditions, ArcelorMittal’s profitability has remained positive due to growth through investment in high quality organic projects and cost control measures. The company has successfully diversified its portfolio across products, end markets, and geographies. ArcelorMittal has commissioned three projects in 2024, some of which include a hot strip mill in Mexico and a cold mill complex in Brazil. The company is also actively investing in renewable projects,  including a 1GW solar/wind project in India and Brazil. Additionally, debt levels of the company have declined from $15.7 billion in 2015 to around $6 billion now. 

So is 2x growth in earnings possible? Sure. It looks quite reasonable when you combine revenue growth with earnings growth.

Now, if earnings double, the PE multiple will become half, assuming the stock price stayed the same. But that’s exactly what ArcelorMittal investors are betting will not happen. If earnings double over the next few years, instead of the PE shrinking to half from current levels of around 6x now (adjusted basis), a scenario where the PE metric stays at about 6x looks more likely. This would make a 2-3x growth in ArcelorMittal’s stock price a very real possibility.

So yes, ArcelorMittal could in fact be considered to be undervalued right now – with a word of caution to evaluate ArcelorMittal’s capital expenditure plans and any delays or cost escalations in the same, the unstable situation in Ukraine currently with capacity utilization at 40%, as well as any potential trade restrictions in North America with the new government coming in. 

The increase in MT stock over the last 3-year period has been far from consistent and has largely been as volatile as the S&P 500. Returns for the stock were 40% in 2021, -16% in 2022, and 10% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could MT face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

What about the 5-year time horizon for our scenario? In practice, it won’t really make much difference whether it takes 4 years or 5, as long as ArcelorMittal is on this revenue and margin expansion trajectory. The stock price will likely respond in a similar way.

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

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