MT - ArcelorMittal - has an excellent five year average ROE of 26.9%

ArcelorMittal is parlaying its sheer size into massive profits as the steel sector stays hot. The company has been on an acquisition binge, announcing 35 transactions in 2007 alone. It has also been buying back stock to the tune of $1.8 billion in 2007 and expects to buy back $2.1 billion in 2008. ArcelorMittal trades at a price-to-earnings of only 10.69.

Full Analysis

ArcelorMittal Sa Luxembourg (MT), headquartered in Luxembourg, is the world's largest steel company, with 310,000 employees in more than 60 countries.

ArcelorMittal, a Zacks #1 Rank (Strong Buy), resulted from the 2006 merger of Arcelor and Mittal. In 2007, with a steel production of 116 million tonnes, the company manufactures approximately 10% of the world's steel output.

The company was on an acquisition tear in 2007, announcing 35 transactions and completing 14 of them for a total cost of $12.3 billion. MT's strategy is to diversify geographically into Argentina, Brazil, China, Costa Rica, Mexico and Poland and to continue product diversification into pipes and tubes, galvanizing, stainless steel and wire businesses.

On Feb 13, ArcelorMittal reported fourth-quarter and full-year earnings. For the year, net income was $10.4 billion, up 30% year-over-year. The company provided first quarter 2008 EBITDA guidance of $4.7 billion to $5.0 billion compared to $4.3 billion in the first-quarter 2007. It expects first quarter performance to be comparable to fourth-quarter 2007 levels.

"2007 has been a truly excellent year for ArcelorMittal. We are announcing today record earnings with EBITDA of $19.4 billion, some 27% higher than pro forma 2006 results, and strong cash flow from operations. This reflects the strength of the ArcelorMittal business model, which enables us to benefit from a healthy global demand for steel in both the high-quality developed and fast-growth developing economies," said Lakshmi N. Mittal, President and CEO.

The company has a policy of returning 30% of net income to shareholders. In 2007, MT returned $4.4 billion to shareholders with $1.8 billion in cash dividends and $2.6 billion spent on share buybacks. For 2008, ArcelorMittal expects to return $3.1 billion with $2.1 billion in cash dividends and $1.0 billion in share buybacks. Currently, the company pays a dividend of 1.80%.

The steel makers are taking hits from the increases in raw materials needed to make steel but have been responding by raising steel prices accordingly. ArcelorMittal sees global demand growing by 3% to 5% over the next decade even with China's economy slowing.

Brokerage analysts have been raising consensus estimates on the full year in the last 30 days. Four out of six covering analysts raised estimates by 41 cents to $7.97 from $7.56 per share.

ArcelorMittal is still cheap, despite the recent run-up in the stock. The company has a 2008 P/E of 10.69. Its price-to-book is 1.59, under the industry average of 2.16. The company's return on equity in 2007 was 18.3%. MT also has an excellent five year average ROE of 26.9%.

Content Courtesy: Zacks Investment Research

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