Rising Demand For Advanced Steels Will Drive Strong Long Term Earnings Potential

Catalysts

About ArcelorMittal

ArcelorMittal is a global steel and mining leader focused on high value, differentiated steel solutions and integrated raw materials operations.

What are the underlying business or industry changes driving this perspective?

• Execution of the multiyear strategic project pipeline, including the Liberia expansion, Hazira growth and Calvert EAF ramp up, is set to add billions of dollars of incremental EBITDA, supporting sustained revenue growth and higher earnings through the cycle.
• Emerging trade frameworks in Europe, Brazil and North America, including safeguards, antidumping actions and CBAM, are tightening the competitive landscape, enabling higher capacity utilization and structurally stronger spreads, which should reinforce group EBITDA margins and returns on capital.
• Rising demand for advanced steels in energy, infrastructure and mobility, coupled with ArcelorMittal’s investments in high quality electrical and automotive grades, positions the company to capture premium mix and pricing, underpinning net margin expansion.
• Disciplined capital allocation, with stable CapEx envelopes focused on high return growth projects and a proven capital return policy, should convert structurally higher cash generation into growing free cash flow and compounding earnings per share.
• Recovery in global steel demand supported by lower interest rates, improving PMIs in Europe and strong end markets in India and selected North American franchises is expected to lift volumes on an optimized asset base, driving operating leverage and accelerating revenue and EBITDA growth.

Assumptions

This narrative explores a more optimistic perspective on ArcelorMittal compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming ArcelorMittal's revenue will grow by 7.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.2% today to 8.2% in 3 years time.
• The bullish analysts expect earnings to reach $6.2 billion (and earnings per share of $8.13) by about December 2028, up from $2.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 20.9x.
• The bullish analysts expect the number of shares outstanding to decline by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global steel overcapacity, particularly the continued high export volumes and weak pricing from China, could keep international steel prices depressed for longer than expected, limiting ArcelorMittal’s ability to sustain elevated spreads and pressuring revenue and EBITDA margins through the cycle.
• Reliance on protective trade frameworks such as European safeguards, CBAM, Brazilian antidumping measures and potential USMCA outcomes introduces political and regulatory risk. Any dilution, delay or rollback of these tools would expose the company to cheaper imports, undermining utilization rates, pricing power and earnings.
• Persistent operational and regulatory headwinds in specific regions, such as recurring technical problems in Mexico, structurally high energy and CO2 costs in Europe and Ukraine, and low domestic prices in Brazil and India, could erode the benefits of strategic projects and asset optimization, constraining group profitability, net margins and free cash flow generation.
• The energy transition and decarbonization agenda require large, sustained capital expenditures at a time when free allocations of CO2 allowances in Europe are phasing down. If steel demand or spreads disappoint, the resulting combination of higher compliance and investment costs could weaken returns on capital and compress earnings.
• ArcelorMittal’s capital return policy and history of substantial buybacks increase financial leverage to industry cycles. If working capital swings, demand softness or regional losses persist longer than anticipated, the company may have to curtail shareholder returns or growth spending, negatively affecting earnings per share and the equity story.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for ArcelorMittal is €45.08, which represents up to two standard deviations above the consensus price target of €37.47. This valuation is based on what can be assumed as the expectations of ArcelorMittal's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €45.08, and the most bearish reporting a price target of just €27.66.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $75.7 billion, earnings will come to $6.2 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of €38.7, the analyst price target of €45.08 is 14.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.