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Last week, I made a promise that I'd abandon my unfocused ways and dig in on five stocks that look particularly interesting right now. Taking center stage right now is ArcelorMittal (NYSE: MT  ) , the 500-pound gorilla of global steel production.

I'll start by saying that I am not an expert when it comes to metals and materials, let alone the steel industry in particular. So why would I even consider investing in a company like ArcelorMittal?

Knowing what I don't know -- that is, the dynamics of the steel industry -- will keep me from trying to wax poetical on the topic and trying to make any sort of predictions that hinge on that part of the picture. On the other hand, there are some things that I do know, namely:

  • What it means to be a vertically integrated, global leader with scale.
  • The importance of savvy, committed leadership with a sizable ownership interest.
  • The signposts of solid financial performance.
  • What an attractively priced stock looks like.

Let's take a closer look at each of these points.

Bigger can definitely be better
There are good businesses, and there are great businesses. What separates the two? A, if not the, key is what many investors refer to as a company's "moat." Just as with the castles in King Arthur's day, a strong moat keeps competitors at bay. This allows a company with a strong moat to be able to produce above-average returns over a long period of time.

ArcelorMittal has a moat in the form of scale. Simply put, the company has a massive footprint in the steel industry, towering over competitors like Hebei Iron and Steel, POSCO (NYSE: PKX  ) , and United States Steel (NYSE: X  ) when it comes to steel production. While size can mean a company is simply bloated, it can also mean the company enjoys more efficient production, has a better negotiating position with suppliers, and can offer customers a more reliable supply line. I believe the latter situation is the one in which we find ArcelorMittal.

Committed leadership
Lakshmi Mittal was the architect behind Mittal Steel, a company he founded and built for decades through mergers and acquisitions. His deal making reached a high point in 2006 when he agreed to merge Mittal with steel giant Arcelor, creating ArcelorMittal. This is no industry piker managing solely through high-level deal making and university theories -- Mittal is a committed steel man, having started his career working in his family's steel business.

Insider ownership can be a pretty big selling point for an investment. For a small public shareholder, it's a meaningful show of confidence when an executive has a serious amount of his own worth at risk in the business. How meaningful is this metric? Fool co-founder Tom Gardner has said that if he were forced to pick just one metric to choose an investment on, insider ownership would be it.

For a $31 billion business like ArcelorMittal, it's unusual to see an executive own a really substantial stake in percentage terms. Larry Ellison owns 22% of Oracle and Larry Page and Sergey Brin each have an 8% stake in Google, but in general, you don't see percentage ownership levels nearly that high in multibillion-dollar businesses. That's where ArcelorMittal is pretty unusual -- Lakshmi Mittal owns more than 41% of ArcelorMittal.

To be sure, heavy insider control like that has its risks, but generally speaking, it's a very good sign.

The numbers don't lie
The steel industry is cyclical, so it's to be expected that ArcelorMittal's performance is going to fluctuate with swings of the industry and the economy more broadly. A look at the company's recent numbers may not be particularly impressive -- for the past 12 months, it's reported a slim 3.6% net income margin and a 4.9% return on capital. However, if we look back over the decade ending in 2010 -- a decade that included two recessions -- we see an average return on capital of 14%.

Meanwhile, the company has done a very good job managing the business through cycles and maintaining profitability. There has only been one year in the past decade (2001) when the company had an operating or net loss for the full year.

ArcelorMittal has also significantly improved its balance sheet over the years. In the worrying times of 2001, the company had a debt-to-equity ratio of 704% and its EBITDA-to-interest expense ratio was just 0.2. At the most recent quarter, the company's debt-to-equity ratio was 42% and over the past 12 months EBITDA was 6.2 times its interest expenses. Importantly, that latter ratio stayed relatively comfortable even during the worst of the last recession, falling to a still-reasonable 3.8 in 2009.

That's one cheap stock
As I noted above, I'm no steel industry expert, so that puts me at a bit of a disadvantage in trying to value ArcelorMittal by predicting future earnings. Comparing its multiples to other companies and the market broadly, the stock's current multiples look attractive -- enterprise value-to-sales is 0.7, enterprise value-to-EBITDA is less than five, price-to-trailing earnings is 8.7, and price-to-forward earnings is 5.6. But in a cyclical industry, current-year multiples can often be misleading, so I'm not willing to hang my hat on those.

So what do we do? Recently, I looked at five stocks that were particularly cheap on the basis of average 10-year earnings. This was a favorite measuring stick of value godfather Ben Graham and is the concept behind the broad-market valuation that Yale economist Robert Shiller uses. The idea is that when you average earnings over a decade, you capture the effects of both up cycles and down cycles and get a more accurate picture of a company's earnings power, which you can then relate to today's price.

And wouldn't you know it? ArcelorMittal was one of the companies that made my list in the previous article. With a price-to-average 10-year earnings of just 7.3, the stock looks almost undeniably cheap to me.

My take
An investment in ArcelorMittal would require extra work on my part because I'd have to get more up-to-speed on an industry that I'm not intimately familiar with. That's sort of a strike against it (only "sort of" because I do enjoy getting my learn on). On the flip side, the points that I've outlined above are very strong selling points for an investment. And as a big fan of dividends, the case isn't hurt by the stock's nice dividend yield; though it's notable that the dividend has been slashed by half from its peak level in 2008.

As of right now, this is very much in contention for the top spot on my buy list -- currently jockeying for that spot with Home Depot (NYSE: HD  ) , which I looked at last week. But no winner will be crowned until I've reviewed all five of the stocks that I've set out to dig into. Stay tuned for those dispatches and my pick of the eventual winner.

In the meantime, hopefully I've given you a lot to think about. As you digest this and dig into the numbers yourself, you should go ahead and add ArcelorMittal to your watchlist to keep up with what's going on at the company. Don't have a watchlist? You're in luck, you can start one for free by clicking here.

The Motley Fool owns shares of Google and Oracle. Motley Fool newsletter services have recommended buying shares of Google and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (12) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2011, at 11:40 AM, summertimeVA wrote:

    I am an expert in the steel industry and MT maybe cheap by all counts but it is highly leveraged, does not have production in India and China (the two markets with the highest growth) and it's production in western Europe is not fully utilised.

    Buying MT today is like buying it in 2008- same price and it did go for a ride then. The question is how many stocks are trading at their 2008 values (very very low) and which is going to be the fastest growing.

    MT was at 18 USD and then rocketed to 48 within 8 did a whole bunch of other companies

  • Report this Comment On August 29, 2011, at 1:34 PM, brchad wrote:

    Looks as if you got it backwards. MT is up... but X is ahead of them by 2% with a 6% gain at this point.

    Maybe the moat sprung a leak?

  • Report this Comment On August 29, 2011, at 5:19 PM, pepstein wrote:

    I think you are right on regarding MT. Last week I bought 1,000 shares and today another 500. This stock is undervalued at half its book value and has potential (based on Graham's formula) for about a $45.00 upside.

    I like Mittal, he has been in the business since he was a kid, so if anyone know steel, he is the guy.

    I am looking forward to watching this stock's growth.

  • Report this Comment On August 29, 2011, at 6:03 PM, TMFKopp wrote:


    "it is highly leveraged"

    What metric and comp set are you using to determine this? It looks to me like MT is one of the lowest leverage companies in the steel industry...

    "does not have production in India and China"

    Yes, but it's partnering on plants in China and has stuff in the works for India. Wouldn't you think that'd be a big upside opportunity for the company?


  • Report this Comment On August 29, 2011, at 6:04 PM, TMFKopp wrote:


    Are you trying to poke a hole in my thesis based on today's one-day stock performance? If so, then you and I see the world in a very different way.


  • Report this Comment On August 30, 2011, at 3:46 AM, kariku wrote:

    What worries me is the big debt they have.

  • Report this Comment On August 30, 2011, at 12:02 PM, TMFKopp wrote:


    I'll ask you the same question as above... On what basis are you determining that MT's debt load is so scary?


  • Report this Comment On September 01, 2011, at 9:14 PM, dkhariwala wrote:

    hi Matt,

    nice article. i am still a stock novice, so may be you can explain better. MT's current stock price is about half of book value. Isnt that a great plus point to add to your thesis ? Not sure why you left it out, or am I missing something. I see everyone make a big hue and cry on BRK going below book value recently ... why not on MT? Will appreciate your answer. Thanks.

  • Report this Comment On September 02, 2011, at 1:47 PM, summertimeVA wrote:

    compared to other steel players it's debt is hig and also triple b rated, with the current turmoil, not a good scenario to outplay. Take today's shut down of a blast furnace (MT idles another blast furnace) these are not good signs in the steel business. Regarding India and China if you partner you partner very different ball game as the worlds largest steel manufacturer does not have it's own production unit, control, synergies with it's other steel plants. MT is a great company and please stop calling it cyclical - the steel industry was transformed by MT and the idea was to make the industry non cyclical which today seems like it failed but it is the future so again if you are in the long term game it is a buy but short term-1 yr horizon there are other better buys.

  • Report this Comment On September 07, 2011, at 5:37 PM, thidmark wrote:

    "but short term-1 yr horizon there are other better buys"

    Yeah, I think they're called certificates of deposit

  • Report this Comment On September 08, 2011, at 2:23 PM, TMFKopp wrote:


    "MT's current stock price is about half of book value. Isnt that a great plus point to add to your thesis ? "

    Short answer: Yes. Good call.


    You still haven't clarified how you're determining that Arcelor is highly leveraged. On the basis of debt as % of total capital, it is less leveraged than Nucor, U.S. Steel, POSCO, Nippon Steel, Baoshan Iron, and on and on... So I'm a bit confused as to why you're so concerned about its debt.

    Also, I'm not holding my breath for the day that the steel industry isn't cyclical. But that's just me.


  • Report this Comment On September 12, 2011, at 11:51 AM, summertimeVA wrote:

    Hi Matt

    Please take a look at MT price today as well as: (financial strenght) vs industry and profitability ratios.

    It is a great company but it is too big to handle without operations in India and China you could buy other companies......also in steel

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