ArcelorMittal: Is the Worst Really Over?

NEW YORK ( TheStreet) -- Anytime you're caught asking "How much worse can things get," that's usually a sign that you've held on to a stock long past the optimal selling opportunity. It's never a good feeling.

ArcelorMittal ( MT) investors who housed their faith on a rebound in the steel industry are now learning this valuable lesson as the stock, which has been down by as much as 40% on the year, is down another 3% as of this writing.

While ArcelorMittal has enjoyed a solid reputation as the premier name in integrated steel, where it competes with others like U.S. Steel ( X) and POSCO ( PKX), ArcelorMittal has shown no immunity to a brutal steel market, which has suffered due to weak prices and slumping demand. And on Thursday, following another disappointing earnings report, during which the company cut its full-year forecast due to weak production, management has answered the questions; things can still get worse.

Given the dire state of the industry, not much was expected this quarter. In fact, in the months leading to this report, analysts had cut as much as 15 cents from their prior estimates. But it wasn't enough. On Thursday, the company reported a net loss of $780 million (585 million euros) -- reversing a year-ago profit of $1.02 billion.

Revenue, meanwhile, fell to $22.2 million from $22.5 million in the year-ago quarter. It is clear that the company's significant exposure to Europe and North America, from where roughly two-thirds of its revenue comes, is weighing down on growth. Europe, in particular, has been hit the hardest as the company posted a net loss of 150 million euros, of which restructuring costs accounted for 119 million euros.

It wasn't a stellar quarter for ArcelorMittal. And the company didn't pretend as if it was. But investors should take solace in the fact that it is indeed possible that this time the worst is indeed over. That revenue fell only slightly this quarter by 1.3% in encouraging, especially considering that the company posted a 13% year-over-year revenue decline in the May quarter. So there some signs that the deceleration of growth appears to be slowing.

In that regard, I don't believe that should take for granted that there was a 1.7% sequential increase in steel shipments. This is a meaningful improvement from the overall 6% decline in the May quarter. And let's also note that the company reported $1.7 billion in earnings before interest, taxes, depreciation and amortization, the standard metric used to measure performance in the steel industry.

I won't argue that EBITDA was still significantly down on a year-over-year basis (down 29%). But even so, not only was the $1.7 billion inline with analysts' estimates, but it also represented a 19% sequential increase. All of this points to the fact that the company's restructuring efforts are beginning to pay dividends.

Admittedly, I was a bit skeptical in April when management announced a two-year plan to take out upwards of $3 billion in incremental costs in a "cost optimization program." I thought the details were a bit vague. But management was confident that the program, which focuses more on variable cost reductions than on fixed cost savings, would work. And based on the sequential improvement, I have to agree.

Interestingly, though, as management highlighted the obstacles that the company faced in the quarter, which included weak shipments and slumping prices in low raw materials, management was exceptionally optimistic that the company will see a rebound in the second half of the year. While the skeptic in me recalls this same level of confidence in 2012, which led only led to more disappointment, the $3 billion restructuring program is an extra element that wasn't available then.

All of that said, it's still too premature to say with any degree of certainty where this company is heading, especially with profit margins down almost 60% for the first six months of the year. So making a bet on the stock here will require plenty of penitence and trust that management knows what it's doing. And it also helps to have some "balls of steel" -- if you will pardon the expression.

At the time of publication the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

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