Underperform on ArcelorMittal (MT) (X)

We are retaining our Underperform recommendation on ArcelorMittal (MT) following its dismal third-quarter 2012 results. The company swung to a loss in the quarter, hurt by weak economic conditions and lower steel pricing.

Adjusted loss per share of 31 cents a share missed the Zacks Consensus Estimate of earnings of 6 cents per share. Revenues slipped nearly 19% year over year to $19,723 million, trailing the Zacks Consensus Estimate of $21,189 million.

The company, in its third quarter call, announced its plans to slash its annual dividend to 20 cents per share in 2013 from 75 cents per share in 2012. The move is expected to offer roughly $850 million in savings next year.

ArcelorMittal remains affected by the challenging economic conditions in Europe. It is also exposed to volatility in steel pricing and tough competition and has significant debt, which is almost equal to its market capitalization.

Increased domestic imports, production ramp ups by peers and increased Chinese production have led to oversupply in the industry, which in turn, is causing a decline in steel prices. The effect of price declines was witnessed across all segments in the third quarter and led to a contraction in the top line.

Moreover, the world economy is struggling and the recessionary conditions persist in Europe. The concerns surrounding the looming U.S. fiscal cliff is also contributing to weak demand and lower steel pricing. Weak construction activity in the U.S. and Europe remains another concern. Weakness in key end markets may hinder the company’s earnings power moving ahead.

In addition, ArcelorMittal is saddled with high debt. Although the company is diligently working toward reducing the amount of debt on its books through divestments, a debt of roughly $23.2 billion against a market capitalization of around $24.3 billion is concerning.

ArcelorMittal, which competes with U.S. Steel Corp. (X) and Tata Steel Limited, retains a Zacks #5 Rank, indicating a short-term Strong Sell rating.