On Jan 10, 2015, Zacks Investment Research downgraded steel giant ArcelorMittal (MT) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).
Why the Downgrade?
Luxembourg-based ArcelorMittal, the world’s leading steel company, has seen some recovery lately. However, the steel industry is still affected by overcapacity and the tough pricing environment remains another concern.
Demand and pricing for steel remain weak. Lower iron ore pricing is also hurting the company’s mining business. Iron ore prices remain affected by supply gut and sluggish demand.
ArcelorMittal has seen its shares tumble around 38% over a year. It has also witnessed downward estimate revisions since the release of its third-quarter 2014 results. The Zacks Consensus Estimate for earnings for 2014 has decreased 52% to 24 cents per share. Moreover, the Zacks Consensus Estimate for 2015 has declined 35% to 73 cents per share.
Although ArcelorMittal remains committed to pare debt, it continues to operate with a high debt level. Its total debt at the end of the third quarter was roughly $21.9 billion against a cash balance of $4.4 billion. As such, high interest expense may weigh on its bottom line
ArcelorMittal continues to contend with a difficult economic environment, especially in its biggest market – Europe – where recovery remains constrained by high unemployment and weak credit growth. Its European business remains under pressure due to lower average steel selling prices. The recovery in the demand environment is expected to be sluggish in the region in the near term.
The steel industry faces challenges in the form of an expected deceleration in steel usage in China due to weaker infrastructure investment growth and a slowdown in the country's property market which accounts for a significant part of its steel consumption.
The unfavorable impact of real estate has prompted the company to cut its demand growth outlook for steel in China to between 1.5% and 2% for 2014 as compared to its earlier view of 3% provided during second-quarter 2014 results announcement.
Stocks to Consider
Better-ranked companies in the basic materials sector include LB Foster Co. (FSTR), Mechel OAO (MTL) and Banro Corp. (BAA), all carrying a Zacks Rank #2 (Buy).
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