MT Downgraded to Underperform


We are downgrading our recommendation on the steel giant, ArcelorMittal (MT) to Underperform from Neutral based on its disappointing fourth-quarter 2011 results.

The company’s reported net loss of 65 cents per share in the fourth quarter of 2011 was much below the Zacks Consensus Estimate profit of 10 cents per share and last year’s loss of 51 cents per share.

During the quarter, total steel shipments also decreased to 20.6 million metric tonnes versus 21.1 million metric tonnes in the prior-year quarter.

However, quarterly revenue increased 8.5% to $22.4 billion from $20.7 billion in the year-ago quarter, but decreased 7.3% sequentially from $24.2 billion. Sequential decline was primarily due to lower average steel selling prices (-6.2%) and lower volume of shipments (-2.5%).

The steel industry is affected by global production capacity and fluctuations in steel imports/exports and tariffs. Currently, China is the largest global steel producer by a large margin. Over the short-to- medium term, ArcelorMittal remains exposed to the risk of steel production increases in China and other markets, outstripping increases in real demand, which may weigh on price recovery.

Steel prices are volatile, reflecting the highly cyclical nature of the global steel industry. After the crisis of 2008, ArcelorMittal has paid down its debt by over $10 billion ($26.5 billion in 2008 to $19.7 billion in 2010) and has restructured the remaining debt to reduce its exposure to bank borrowing. As of December 31, 2011, the company had liquidity of $12.5 billion, an increase of $1.2 billion compared with that of September 30, 2011.  In terms of liquidity, we believe AreclorMittal is well positioned.

However, the steel industry is also highly competitive. We believe established producers expanding in new markets, smaller producers increasing production or exporters selling excess capacity from markets such as China could cause ArcelorMittal to lose market share, increase expenditures or reduce pricing. Any of these developments could have a material adverse impact on its business, financial condition, results of operations or prospects.

ArcelorMittal competes with United States Steel Corp. (X) and Tata Steel Limited.

Moreover, based on the fourth quarter 2011 results, the company expects the EBITDA in the first half of 2012 to be lower than first half of 2011, but above second half of 2011, supported by continued progress on management gains and asset optimization plans.

ArcelorMittal expects steel shipments in the first half of 2012 to be at a similar level as the first half of 2011. Mining production is expected to be higher than in the first half of 2011, in line with its plans to increase iron ore and coal production by approximately 10% in full-year 2012.

We downgrade our recommendation on ArcelorMittal to Underperform from Neutral with a Zacks #5 Rank (Strong Sell) on the stock.

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