On Thursday, BofA Securities upgraded stock of steel manufacturing company ArcelorMittal (NYSE:MT), traded on the Euronext (EPA:ENX) Amsterdam (MT:NA) and the New York Stock Exchange (NYSE: MT), from Neutral to Buy. Alongside the upgrade, the price target was increased from EUR28.00 to EUR31.00.
The upgrade was based on a new valuation approach, shifting from a price-to-book (P/B) multiple methodology to a Sum of the Parts (SOTP) analysis. Mann explained that the SOTP method is now more appropriate due to significant changes in ArcelorMittal's earnings structure and regional investment focus.
The new price target suggests that ArcelorMittal's stock would trade at approximately 4.7 times enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) and 0.45 times P/B. This valuation is slightly below the historical average P/B but aligns with the EV/EBITDA ratio.
The rationale behind the methodological change stems from a shift in ArcelorMittal's earnings, with North America now surpassing Europe as the company's largest source of EBITDA, accounting for about 28%. The company's strategic capital expenditures have been almost exclusively outside Europe in recent years.
Additionally, the valuation gap between regional multiples has widened, with North American steel now trading at roughly double the EV/EBITDA multiple of European steel.
Moreover, Mann highlighted ArcelorMittal's disciplined approach to decarbonization-related capital expenditures. The company's strategy, which requires returns and competitive costs, is anticipated to limit potential downsides to the group's cash flows and overall valuation.
Minor adjustments have been made to the firm's estimates for ArcelorMittal, as indicated in the provided financial table. The new price target of EUR31.00 corresponds to an American Depositary Receipt (ADR) price of $32.90, up from the previous ADR price of $30.00.
In other recent news, ArcelorMittal, the globally recognized steel and mining company, reported a resilient Q3 performance in its earnings call. Despite facing market adversities, the company maintained a robust EBITDA margin of $118 per ton, contributed notably by North America and Brazil.
ArcelorMittal's strategic growth projects are forecasted to add $1.8 billion to the EBITDA, with $1 billion expected in the next two years. The company also returned significant value to shareholders, repurchasing $280 million of stock in Q3, reducing the share count by 6% in 2024.
ArcelorMittal reaffirmed its commitment to a $10 billion decarbonization target by 2030 and plans to return at least 50% of its free cash flow to shareholders while maintaining low net debt. These are among the recent developments for the company.
InvestingPro Insights
ArcelorMittal's recent upgrade by BofA Securities aligns with several key insights from InvestingPro. The company's stock is currently trading at a low Price / Book multiple of 0.35, which supports Mann's valuation approach and the potential for upside. This metric, combined with the InvestingPro Tip that ArcelorMittal is "trading at a low revenue valuation multiple," reinforces the analyst's bullish stance.
Moreover, the InvestingPro data shows a strong 3-month price total return of 9.6%, indicating positive momentum that could support the upgraded price target. The company's management has been aggressively buying back shares, which is often a sign of confidence in the company's future prospects and aligns with the disciplined approach to capital expenditures mentioned in the analyst report.
It's worth noting that ArcelorMittal has a high shareholder yield and has raised its dividend for 4 consecutive years, according to InvestingPro Tips. These factors may contribute to the stock's attractiveness for investors seeking both growth and income.
For readers interested in a more comprehensive analysis, InvestingPro offers 13 additional tips for ArcelorMittal, providing a deeper understanding of the company's financial health and market position.
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