christo1 schreef op 25 mei 2022 21:05:
ArcelorMittal S.A.: Strong Buy On A Breakout
May 25, 2022 10:47 AM ETArcelorMittal S.A. (MT)3 Comments1 Like
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Summary
Shares look to be undergoing a double bottom pattern.
Free cash flow trends are aligned with the bullish technicals.
Ignore short-term growth estimates (which actually are improving due to more encouraging near-term revision estimates).
Sede de ArcelorMittal Francia
HJBC/iStock Editorial via Getty Images
Intro
There are a lot of encouraging signs in the technical chart of ArcelorMittal S.A. (NYSE:MT) (Integrated Steel Firm) which we believe will lead to a breakout in the stock sooner rather than later. First, as we can see below, shares approximately 18 months ago broke out above the stock's multi-year bearish trendline. Shares went on to rally from that point but then came up against stiff resistance of the January 2018 highs. Shares of ArcelorMittal S.A. have been caught in a trading range for the past 12 months or so as a consequence.
What we deem attractive though on the long-term chart is that we have bullish divergences in the RSI momentum indicator (both on the upside & downside) and also in the MACD indicator. In fact, we believe the present pattern is shaping up as a double bottom pattern and the height of this pattern should alert investors to the significant potential here. The breaking of the downcycle multi-year trendline was the initial confirmation step of this pattern. Now shares need to follow through by breaking above thatthe second & defining step).
In saying the above, the technicals are merely the result of the fundamentals happening within the company. Therefore, as you will see below in ArcelorMittal's trends in profitability primarily around its cash flow, the internal fundamentals do indeed line up with what the technicals are demonstrating.
MT Potential Double Bottom Pattern
MT Long-Term Technical Chart (StockCharts.com)
Profitability
Our favorite profitability metric is undoubtedly free cash flow. This metric basically is the cash left over after accounting for operations and the maintenance of the company's capital assets. Many times, they are referred to as the owner's earnings or the capital left over after all monies to run the business (operating & capital costs) have been spent. The thing is, the more free cash flow a company has and the more effective that very-same cash can be deployed, the faster the company can grow in the long run.
ArcelorMittal S.A. generated $8.02 billion of cash flow over the past four quarters. Now that is a sizeable chunk of change for the company considering the company's market cap is $26.43 billion. However, when we look at where the lion's share of this capital went, it is clearly evident how value gets added to the enterprise over time. $4.76 billion went towards the company's debt load. $5.02 billion went towards share buybacks and $572 million went to shareholders in the form of dividend payments. Book value or MT's net-worth increases from lower debt. Earnings per share increase from having a smaller float and the dividend paymentsare obviously compensation for shareholders.
Suffice it to say, if present trends continue, the company is going to gain value, period. Whether the market rewards the stock in the short term for gaining more value is an unknown at this point. In fact, Ben Graham to this point once said the following.
In the short run, the market is a voting machine. But in the long run, it is a weighing machine.
The above statement basically means that eventually the stock in question will be priced correctly. This may take some time but the longer book value rises (MT's book value rose to $53.79 billion at the end of Q1), the more probable that shares will eventually get priced higher - period.
Growth Is Overrated
A typical bearish argument on ArcelorMittal S.A. at present would be the assumption that the searing growth that the company experienced last year has already been priced in. Furthermore, one could strengthen this argument by bringing up bottom-line consensus numbers that actually come in negative (in terms of growth - Projected EPS of $11.67) for fiscal 2022 and beyond.
We return though to the premise discussed above of how free cash flow impacts a company. For example, a company can be growing like gangbusters but be consistently failing to produce any free cash flow. On the contrary, you can have a company temporarily experiencing negative bottom-line earnings growth (what ArcelorMittal S.A. may experience this year) but producing sizable amounts of free cash flow.
With respect to ArcelorMittal S.A., the company's forward cash flow multiple of 2.27 is actually less than the trailing counterpart of 2.45. This means (all things remaining equal) that free cash flow is expected to be higher this year despite the fact that earnings are expected to fall by almost 13% this year. WeWe reiterate the point - growth is overrated.
Conclusion
To sum up, given ArcelorMittal's cash flow trends, how cheap this cash flow indeed is, and the resulting technicals, we believe shares have every chance of breaking above long-term resistance shortly. We reiterate the point that near-term growth is overrated in this stock as the company will most likely continue to grow, nevertheless. Let's see how Q2 shapes up. We look forward to continued coverage.