Is your portfolio looking a bit wobbly? Perhaps a bit of steel will help firm it up. As it happens, there's a steel company -- and a Motley Fool Inside Value recommendation -- unveiling its quarterly numbers tomorrow. Mittal Steel (NYSE:MT) reports on its fiscal Q1 2006 tomorrow.
What analysts say:
- Buy, sell, or waffle? Four analysts follow Mittal; all of them rate it a buy.
- Revenues. Sales are expected to come in 20% higher than last year, at $7.7 billion.
- Earnings. Profits are expected to tumble 40% to $1.06 per share.
What management says:
The big news at Mittal these days is, of course, its ongoing struggle to consume Arcelor, the world's No. 2 steelmaker. Mittal's bid has sparked yet another surge in nationalism that ranges from Arcelor's host country, Luxembourg, to the nearby Luxembourgian suburb known as "France." In an attempt to mollify the locals, Mittal CEO Lakshmi Mittal tried this tack recently: "Europe is steeped in industrial tradition, and yet today, few European industrial companies are global sector leaders. This transaction will change that. A European company will be the undisputed No. 1 in the steel business. I believe this creates a business platform from which Europe can only stand to benefit."
Mittal went on to reassure that it is "not planning to cut jobs. We are not planning to shift or reduce investment." And having waved these carrots, he then he bared the stick. He pointed out that since Mittal made its bid, Arcelor's share price had spiked 50%, and he asked rhetorically: "Where does that value go without Mittal?"
What management does:
Where indeed? Euro-jingoism aside, I suspect that Arcelor shareholders have good reason to question whether they really want to be tied to Mittal. Take a look at where the two companies' margins have been headed recently.
Mittal
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
32.3 |
33.8 |
35 |
31.8 |
27.1 |
23.6 |
|
Op. |
26.9 |
28 |
29.1 |
25.8 |
20.9 |
17.1 |
|
Net |
19.8 |
21.2 |
21.7 |
19.3 |
15.7 |
12 |
Arcelor
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
54 |
52.6 |
53.7 |
54 |
53.5 |
52.5 |
|
Op. |
9.6 |
12 |
14.1 |
15 |
14.5 |
13.9 |
|
Net |
4.5 |
7.4 |
9.3 |
10.2 |
10.1 |
11.4 |
The Fool says:
See what I'm getting at? Although the two companies have similar net profit margins today, over the past 18 months, Mittal's gross, operating, and net margins have all fallen steeply, while Arcelor's operating and net margins have risen -- this despite a very small degradation in Arcelor's gross margins.
From the above charts, it's clear to me why Mittal wants to own Arcelor. Arcelor has a better gross margin to begin with, and it has been getting more profitable over time. And with Mittal's reputation for cost-cutting, just imagine how much more it can net out of Arcelor's 52% gross margin than Arcelor is netting today. Furthermore, as Inside Value lead analyst Philip Durell points out: "The merger of the two makes good business sense . and Mittal estimates synergies of $1 billion, or 8% of operating earnings. The two companies have an excellent geographic fit, and Mittal would eliminate a chief rival in steel sales and bidding for further acquisitions."
But it's just as clear why Arcelor shareholders might not want to part with their shares, even after the post-Mittal-bid price run-up.
If you want to read the entire update for Mittal and all of the other bargain-priced Inside Value picks, along with the original recommendations, try out a 30-day guest pass.
Competitors:
- AK Steel (NYSE:AKS)
- Allegheny Technologies (NYSE:ATI)
- Nucor (NYSE:NUE)
- Posco (NYSE:PKX)
- Steel Dynamics (NASDAQ:STLD)
- U.S. Steel (NYSE:X)
Fool contributor Rich Smith does not own shares of any company named above. Posco's healthy dividend earned it a nod from the Motley Fool Income Investor newsletter service. The Fool has a disclosure policy.
