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No. of Recommendations: 3
The steel industry, which is very cyclical, has only come back a way since the "great recession" and if there is a further downturn in the economy it's likely to flounder anew. Assuming the US does avoid a new recession growth will likely be less than 2%. Even if the US avoids a recession there's a possibility that Europe will not and the Chinese economy's prospects, at this juncture, I think, are uncertain. The steel industry is not a place for the faint hearted now, but assuming that domestic and world economies improve in the next few years, there are probably some bargains to be found.

One of the things I noted on Arcelor Mittal was that the stock has a history of extreme volatility in valuation and stock price. It's worth noting that although it's probably a bargain at present prices, provided you can stomach volatility, in both 2002 and 2004 it traded for an average P/E of around 3 (Value Line figures) even though it was experiencing rising earnings. This is less than half of it's present P/E. Whether it will ever revisit those regions again, nobody knows, but I think it worth noting.

Another thing that strikes me about companies in the steel industry is that returns on equity and capital in the present environment are generally fairly poor, and in Arcelor Mittal's case very poor, coming in at just under 5% last year. It's my inclination to stay away from such a volatile stock whose earnings, profit margins, returns on capital, and stock price are all over the place. Also, there doesn't seem to be reasonable certainty in what earnings will do next. Value Line gives them an "Earnings Predictability" rating of 10 (out of 100).

The above average dividend is one attractive attribute. However, MT doesn't have a long history of sustainable, or reliable dividends. It seems it rather depends on their earnings, which of course makes sense. After raising the dividend for four consecutive years they slashed it by 50% in 2008 and it has remained at that level ever since. Value Line does not expect them to raise it again into 2014-'16.

kelbon
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