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Morningstar | ArcelorMittal Once Again Outpaces Our Expectations in 2Q as EBITDA Jumps 46% Year Over Year

ArcelorMittal issued strong second-quarter results as year-on-year profits increased significantly across each steelmaking segment. We now believe the company will exceed $11 billion of adjusted EBITDA in 2018. This represents an impressive accomplishment, as profits have more than doubled since 2015. Having raised our near-term profit outlook, our fair value estimates rise to $20 per share and EUR 17 per share. Our no-moat rating is unchanged, although we do expect ArcelorMittal to generate returns on invested capital above its weighted average cost of capital this year.

Thanks to management's progress deleveraging the balance sheet, the company no longer suffers from elevated financial leverage. Net debt has fallen to $10.5 billion, down from $21.8 billion as recently as year-end 2012. Additionally, the company has now garnered investment-grade credit ratings from S&P, Moody's, and Fitch, with each agency having published its rating upgrade at some point this year. Thanks to the company's lower degree of financial leverage going forward, we've lowered our uncertainty rating to very high from extreme.

The company's Action 2020 plan, which aims to usher in structural improvements for companywide profitability, targeted EBITDA of $8.2 billion by 2020 (a $3 billion improvement from 2015 levels). ArcelorMittal was able to achieve this target well ahead of schedule in 2017. However, given our negative outlook for global steel prices and metal margins, we believe the company will once again fall short of its Action 2020 EBITDA target. We forecast EBITDA of only $7.4 billion in 2020.

Although we expect profits to remain elevated in the near term, ArcelorMittal shares continue to trade well above our fair value estimate. Recently, we've seen evidence of softening steel demand growth in China as the impact of recent stimulus efforts has begun to fade. Additionally, our below-consensus outlook for Chinese gross capital formation will weigh on long-term steel demand.