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ArcelorMittal Transforms Steel

Growing in a Mundane Industry

During 2006 a large merger took place in the steel industry. Indian self-made billionaire Lakshmi Mittal started a hostile takeover battle for Luxembourg-based Arcelor. After months of negotiating the merger was completed and ArcelorMittal was created.

Two years later ArcelorMittal is the largest steel producer in the world at three times the production of its closest rival. Although the company hasn’t yet produced full-year results for 2007, the company’s year-over-year EBITDA (earnings before interest, taxes, depreciation and amortization) increased over 30 percent in the first nine months of last year.
Fourth-quarter results should confirm the positive momentum and put ArcelorMittal on track to achieve its long-stated goal of achieving $20 billion in EBITDA by 2008. This target was long deemed unthinkable by many Wall Street analysts, but the company’s management has proved the skeptics wrong and today the consensus is closer to this figure.
The key question remains whether the company will be able to sustain this level of profitability in the future. Management clearly believes it will.
ArcelorMittal is not only hugely successful but is also changing an entire industry for the better. About 25 years ago the global steel industry was 75 percent government-controlled. These governments were more interested in providing full employment than in adapting steel production to actual demand. This created a very cyclical industry.
Although the steel industry will continue to be cyclical, today only about 25 percent of global steel supply is in governmental hands. This means 75 percent of the world’s steelmakers are looking to make money for shareholders and will adapt production according to demand.
These developments should result in an industry that’s less cyclical and more consistently profitable than ever before. This is why we believe ArcelorMittal deserves to be studied by BetterInvesting-style investors even though its track record might not entirely match what they typically seek.
ArcelorMittal’s assets are balanced geographically as well as by product mix. The company is also vertically integrated because of its ownership of iron-ore mines.
The company’s sales totaled $58.8 billion in 2006 and likely surpassed $100 billion in 2007. Because the merger transformed the company, its historical figures are now less reliable. This is an important caveat when studying ArcelorMittal.
The company’s tax rate is expected to stay stable at around 25 percent. ArcelorMittal is expected to pay a dividend of about $1.50 per share in 2008 for a dividend yield of around 2 percent.
Despite the company’s positives, an investment in ArcelorMittal carries above-average risk. The combined company has a short life span, and although we don’t expect problems from the completed merger, the company is an aggressive acquirer, which could lead to problems in the future. A slowdown in the U.S. economy could lead to a worldwide reduction in steel demand and severely hurt the company’s profitability.
The stock also is largely controlled by one family. Just under 50 percent of the stock is in the hands of father and son Mittal. This hasn’t created conflicts with other shareholders so far, but this could occur in the future.
American Depositary Receipts representing ArcelorMittal’s stock are traded on the New York Stock Exchange under the symbol MT. The stock is also traded in Amsterdam, the Netherlands. (No recommendation is intended. Readers are urged to conduct their own stock studies.)

ArcelorMittal is a medium-growth BetterInvesting-type investment with consistent growth expected over the next three years to five years. Although steel companies have a bad reputation, ArcelorMittal is changing the market’s perception of the industry’s giants.
At its current valuation of nine times 2008 earnings estimates, the stock trades at a discount to its rivals. But in our opinion the world’s largest steelmaker should trade at a premium.

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