The US investment bank JP Morgan has recently cut the valuations of European steel companies ArcelorMittal, Acerinox and Aperam, all of them listed on the Spanish stock market. In the case of Acerinox, the cut has come on the shares listed on the Ibex 35, with a cut of 10,2% from 10,6 euros to 11,8 euros per share. This gives it a potential upside of 15% from its current prices. It is a series of values that have been the most appreciated in recent years. With some highs that have been placed around the double digits.
In any case, everything seems to indicate that the corrections are just around the corner after the new sector report that the US investment bank JP Morgan has developed. In the specific case of ArcelorMottal, the cut of JP Morgan its valuation is on the shares listed on the Euronext Amsterdam. Analysts at the US bank cut their target price from € 36,5 to € 26,5 per share. This is a very deep cut that can play against the small and medium investors who are positioned in this company in the steel industry.
On the other hand, the European Commission has come to point out in the first days of the new year that will impose tariffs of 25% to imports of 26 categories of steel products from third countries. This is another factor that does not play in favor of the business interests of these listed companies. Not in vain, it cannot be ruled out that in the next stock market sessions deep falls may develop in their companies. In this sense, we cannot forget at this time that these companies are cyclical stocks.
Steel companies: cyclical values
As these are cyclical business lines, they are more sensitive to changes in the economic cycle. This in practice means that in the periods of economic expansion they perform better in the equity markets than the other stock markets. But on the contrary, the effects are also more intense in times of economic recession. For this reason, the arrival of a new economic recession on the international scene would undoubtedly imply very strong price cuts. With an intensity that can reach drops of around 20% or 30%, as has happened in previous years.
While on the contrary, it cannot be forgotten that any deterioration in the economy International will have very negative effects on this class of companies. In all and without any kind of limitations. This is the scenario that may emerge from the economic recession and to which small and medium investors must be very attentive. With an eye to entering or exiting the equity markets, depending on the new international scene that emerges. To use one or another investment strategy in order to make the savings profitable above other considerations.
Unfavorable environment for steelmakers
Within this general scenario, the predictions of international organizations are not very favorable for the interests of steel companies in general. In this sense, the IMF projects a growth rate of 3,5% worldwide for 2019 and 3,6% for 2020. They are 0,2 and 0,1 percentage points, respectively, below their latest forecast in October, making it the second downward revision in three months.
These data can harm all companies in the sector as their prices are corrected in the coming months. After having developed a Uptrend which has lasted many years. Therefore, it is not the best of times to be positioned in any of these listed companies that depend on economic cycles. There are other options that can be more profitable from these precise moments. For example, values of a much more conservative profile such as preserving the interests of small and medium investors.
Bond issue
On the other hand, it should be noted that some steel companies offer other investment systems through fixed income markets. This is the specific case of ArcelorMittal, which recently announced the issuance of bonds with a fixed interest rate of 2,250% for a value of 750 million euros within the framework of its EMTN Program for a value of 10.000 million euros. The closing of the issue took place today. The bonds were issued under ArcelorMittal's € 10.000 billion Euro-denominated Medium-Term Bond Program (EMTM Program), aimed at institutional investors.
In another vein, and with regard to the news generated from this same listed company, it should be noted that it has also assumed a leadership role both in the development of ResponsibleSteel and in the commitment to this initiative promoted by entities from various fields with the aim of creating the first global certification framework for the steel industry.
Development in its growth
ResponsibleSteel was established in 2015 as a non-profit organization in order to promote a more responsible future for the steel industry. This objective will be achieved through the development of the first worldwide certification program, and the standards that accompany it, for the entire value chain of the steel industry, from mining activities and production processes to marketing and distribution of processed products.
The certification standards will cover the following areas:
- Climate Change and Greenhouse Gas Emissions.
- Responsible Management of Water and Biodiversity.
- Human Rights and Labor Legislation.
- Local Communities and Business Integrity.
Acerinox results
With regard to the other large steel company that is listed on the equities of our country, the latest business results are quite to the liking of investors. In this sense, Acerinox obtains 221 million euros of profit, after taxes and minority interests, during the first nine months of 2018. The results are 40,5% higher than those of the same period of 2017, in which the company registered 157 million euros.
The group thus achieves its best results of the last decade in the first three quarters of a year and increases its turnover up to 3.872 million euros, 10,3% more than in the same period of 2017. EBITDA for these first nine months of the year was 14,1% higher than that of the first three quarters of the previous year, reaching 422 million euros compared to the 370 then. The third quarter of 2018 closed with profits of 83 million euros (4% more than the 80 million of the previous three months) multiplying by 13 the results of the same period of the year 2017. These results are due to the good situation of the demand for stainless steel in the main markets, especially in the United States.
Other lines of business
Regarding the productions, between January and September there is an increase of 1,9% in steelworks and 5,7% in cold rolling, as well as a slight decrease of 0,5% in hot rolling, always with respect to the same months of 2017. On the other hand, last March began the testing phase of the new AP-5 annealing and pickling line of Acerinox Europa (Campo de Gibraltar, Spain), a team that has the most advanced systems technological and a level of competitiveness that will generate new quality standards, while reducing costs and environmental impact.
The start-up of the new lines is proving very satisfactory. With this new line, Acerinox Europa offers thinner thicknesses (with a width of 1.500 mm) to its end customers, thus expanding its range of products. In addition, during the months of August and September, the AP-3 annealing and pickling line, also from Acerinox Europa, was thoroughly updated to specialize in thick thicknesses, complementing the previous AP-5 and providing it with a pickling system that allows to obtain a level of quality similar to that of the new line.
Dividend increase
The Acerinox, SA Board of Directors, held yesterday, decided to propose to the next Ordinary General Meeting of Shareholders of the Company an increase in the dividend of 11%, which will go from 0,45 to 0,50 euros per share. With the same purpose of increasing earnings per share, the Board of Directors will propose reducing the number of shares issued in the four years (2013-2016) in which the dividend was paid through a flexible dividend or scrip dividend. To this end, it also approved a First Share Repurchase Program for subsequent redemption.
In what constitutes another of the incentives on the part of small and medium investors to take positions in companies in this sector given the profitability of this remuneration to the shareholder. This gives it a potential upside of 15% from its current prices. It is a series of values that have been the most appreciated in recent years. With some highs that have been placed around the double digits.