Operational Leverage And Improved Clarity Have Catapulted ArcelorMittal Shares

Among commodity companies, weaker players typically outperform in up-cycles as they see even greater operating leverage benefits from higher prices and volumes. That would be enough to explain at least some of ArcelorMittal’s (MT) impressive performance since September, but added clarity on capital allocation priorities and operational strategies has analysts feeling quite a bit more confident about a sustained improvement in full-cycle profitability at this giant steelmaker.

I’m cautiously optimistic on the prospects for improved full-cycle profits, as management is both saying and doing the right things, and has taken some meaningful steps to improve returns and walk away from lower-return assets. Still, improvements to commodity company operating models aren’t really proven until the next down-cycle, and that’s clearly not the environment today.

I don’t find Arcelor shares to be particularly cheap today, but that’s in part due to my belief that steel prices are going to start declining in the second half of the year, shrinking the operating leverage for the sector in 2022. I can see upside to the low-to-mid-$30’s on a “stronger for longer” steel market (a more bullish scenario, in other words), but as is I think Arcelor is more or less priced in line with other quality names today.

 

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Operational Leverage And Improved Clarity Have Catapulted ArcelorMittal Shares