It won’t be surprising if 2017 turns out to be a break-out year for steel player ArcelorMittal (NYSE:MT). I am saying this because after the election of Donald Trump as the president, infrastructure demand in the U.S. is set to rise. As a result of a spike in infrastructure demand, the price of steel will increase in the U.S. on the back of higher consumption and restrictions on the import of cheap steel from Asian countries.
So, in this article, we will take a closer look at the factors that will prove to be tailwinds for ArcelorMittal next year and try to find out how much upside the company can actually deliver.
An improving steel market will be a tailwind
The price of steel in the U.S. will stay strong in the coming years. According to Morgan Stanley, higher infrastructure development in the U.S. will lead to a 20% annual growth in steel demand over the coming half decade. This rate of growth will add 22 million tons to the steel demand each year until 2021, and will eventually lead to an increase of 30% in steel prices going forward.
The reason why there will be a deficit in the steel market in the U.S. is because stringent restrictions are being imposed on the dumping of cheap steel from foreign nations. In fact, three anti-dumping decisions have been taken in 2016, with one expected to be complete next year. Due to the anti-dumping moves, steel imports into the U.S. have been trending down.
For instance, last month, imports of finished steel in the U.S. were down 5.5% as compared to the previous months. In fact, through the first 11 months of the year, total steel imports into the U.S. have dropped around 16.8%, while finished steel imports have dropped 17.9% as compared to last year.
Additionally, the likelihood of steel imports into the U.S. declining in the future remains strong as well. This is because the Commerce Department has begun investigations into a petition that Chinese steel companies are routing their steel into the U.S. through Vietnam. This does not seem surprising as imports of Chinese steel into Vietnam have increased 46% in the first six months of 2016, while in comparison Vietnam’s steel exports into the U.S. have increased close to six times.
Thus, due to improving demand and lower imports, the price of steel in the U.S. will continue to improve and this will prove to be a tailwind for ArcelorMittal’s bottom line. Eventually, an improvement in the earnings will lead to stock price upside for the company. Let’s see how.
Earnings growth will lead to stock upside
ArcelorMittal’s bottom line is expected to witness a strong turnaround this year, with the company posting a profit of $0.44 per share as compared to a loss $0.14 per share in the year-ago period. Next year, ArcelorMittal is expected to witness further growth in the bottom line with its EPS slated to grow to $0.62 per share, a rise of almost 41%.
Then, in 2018, ArcelorMittal is expected to report further growth in earnings to $0.71 per share. This means that over the next two years ArcelorMittal’s bottom line is set to increase more than 60%. At this level of earnings, ArcelorMittal will deliver strong earnings growth on account of its P/E ratio.
This year, ArcelorMittal’s price to earnings ratio is expected at 16. At this price to earnings ratio and potential earnings of $0.62 per share next year, ArcelorMittal’s stock price will rise to almost $10 per share.
This indicates an upside of over 35% from current levels. Meanwhile, by 2018, when ArcelorMittal’s earnings rise to $0.71 per share, its stock price will increase to $11.40 per share at a price to earnings ratio of 16. This means that ArcelorMittal will rise another 14% in 2018 as compared to 2017 levels, with its total gains over the next two years amounting to almost 55%.
Though shares of ArcelorMittal are up around 75% in 2016, the above discussion clearly shows us that more upside is possible in the next couple of years, especially in 2017. So, in my opinion, it will be a great idea to buy more ArcelorMittal shares for the next couple of years as it is set to rise higher.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.