We are maintaining our Underperform recommendation on the shares of ArcelorMittal (MT) for the long-term following our assessment of its first-quarter 2012 results. Quarterly earnings missed the Zacks Consensus Estimate while revenues beat the forecast.
The company’s net debt climbed roughly $1.1 billion in the quarter. ArcelorMittal has substantial debt, which makes it more difficult to refinance its maturing debt and flexibly manage its business.
The company expects steel shipments in the second quarter of 2012 to be at similar levels with the first quarter. However, the Mining segment is expected to benefit from seasonally higher iron ore shipments. The company forecasts that all of its segments will demonstrate improved underlying profitability in the second quarter.
ArcelorMittal reaffirmed its EBITDA guidance and expects EBITDA for the first half of 2012 to be higher than the first half of 2011. The company anticipates iron ore and coal production to increase by approximately 10% while capital expenditure is expected to be in the range of $4.0-$4.5 billion for fiscal 2012. Net debt is expected to reduce in the second quarter through improved operating cash flows and further divestment of non-core assets.
ArcelorMittal is the world’s leading steel and mining company. With its presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing world. It is the leader in all the major sectors – automotive, household appliances, packaging and construction. The company is also the world’s fourth largest producer of iron ore, with a global portfolio of 16 operating units with mines in operation or development.
ArcelorMittal remains exposed to volatility in steel pricing. Steel prices remained volatile throughout 2011, rising in the first quarter on strong demand and higher raw material prices but softening in the second half. The prices weakened further in the fourth quarter as iron ore prices dropped sharply in October 2011, and customers started to de-stock in an uncertain economic environment. Though prices increased in first-quarter 2012, any sustained turnaround will require a broad economic recovery.
The company remains affected by the challenging economic conditions across the world. Europe is expected to experience a mild recession. Further, China’s economy is slowing and there is a demand-supply gap in the U.S.
The company competes with U.S. Steel Corp. (X) and Tata Steel Limited, and maintains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.
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