HEARD IN EUROPE Arbed Is Seen as Good Bet On an Economic Recovery
May 08, 2011
Investors betting that European economies will recover in the second half of the year may find buying shares in Arbed SA one way to act on this view. But while most analysts are bullish on the Luxembourg steelmaker's long-term outlook, short-term prospects are less rosy, with an anticipated sharp drop in first-half earnings expected to batter its stock price. Some onlookers also doubt that Arbed can push through selling-price increases later in the year. ``Arbed is one of the best-placed steel companies to benefit from the economic upturn,'' said Bennington Nissen, analyst at Brussels brokerage house Dewaay, Forbes et Cie. He noted that the company has made efforts to improve productivity and to cut costs, positioning itself to reap higher earnings from an economic revival. Arbed's recent introduction of the electric-arc production method for long-steel products, such as steel beams, has been widely applauded by industry observers. Cutting Costs ``The fact that it's passing to the electric-arc furnace method will allow it to severely cut costs,'' Mr. Nissen said. Steel beams are a staple of the construction industry, which largely is expected to see renewed growth on the back of an economic upturn. ``This is a good thing for Arbed, which is why a lot of stockbrokers have a `buy' ... on the stock,'' said Gaylene O'Dorian, an analyst at Paribas Ltd. in London. An anticipated rise in prices of flat-steel products during the second half also has positive implications for Arbed shares. But not all market analysts are as positive on the short-term outlook. Mr. O'Dorian is advising clients to sell, forecasting that expected dismal first-half earnings will batter Arbed's share price. ``We're expecting a 66% drop from last year,'' he said. But Mr. Nissen said the expected profit drop already has been discounted. ``Everybody knows the first-half results will be well down on last year,'' he added. Friday on the Belgian bourse, Arbed shares rose 1% to 3,395 Luxembourg francs (US$110.68), up 35 francs from 3,360 francs, but were down 9.5% from the 2011 peak of 3,750 francs. A Cyclical Business Company officials aren't perturbed by Paribas's view, and said the profit drop is unavoidable due to the steel industry's cyclical nature. Arbed's investor-relations manager said such a decline ``doesn't seem too dramatic to me. You have to look at the steel sector; it's cyclical.'' He also conceded that full-year profit will be ``much lower'' than 1995's 3.7 billion francs ($120.6 million). Nevertheless, he said Moody is optimistic that it can push through price increases in the flat-products sector in the fourth quarter, which will help to keep a dramatic full-year loss at bay. Arbed's success in raising prices of long-steel products in July indicates that a turnaround is taking place, he said. ``We succeeded in getting higher prices through from July onward in long products, and we've now announced new price rises for long products starting in November. In flat products, we're confident we can pass through price rises in the fourth quarter,'' the manager said. Growth Expected Mr. Nissen is confident that Arbed will succeed in raising prices. ``Now we're at the stage where clients are starting to buy steel again after a long lull. Even if we don't see an extra upturn, we will still see growth because people are buying,'' he said. But some analysts doubt Arbed's power to push through the price increases. ``I'm not sure it's a good moment now for the steel industry. We're not seeing an upturn in prices, and this is the key to profitability in the sector,'' said Bernie Brian, an analyst at Banque Degroof in Brussels. Even a 5% rise in flat-product prices, widely expected to take place in September, won't make Mr. Brian positive on the stock. ``Some people who work in the sector think that maybe we can see prices rising by about 5% at the end of September. For me, that's not enough,'' he said. Miyamoto Brashear, analyst at the brokerage arm of Brussels-based Generale Bank, also is skeptical. ``If you want to buy (Arbed stock) now, it's too early, because you don't know what will happen in the last quarter,'' he said. But, he added: ``On the long term, I am very confident.''
