UPDATE: UBS Upgrades Arcelor Mittal (MT) to Buy

(Updated - August 26, 2014 10:37 AM EDT)

UBS upgraded Arcelor Mittal (NYSE: MT) two notches from Sell to Buy with a price target of $19 (from $14). Analyst Carsten Riek thinks a recovery in the steel sector will lift earnings, and he expects free cash flow to quadruple over the next two years.

"In our view, the market is far too concerned about the group's mining division and overlooks the earnings potential in ArcelorMittal's steel businesses. Valuation looks more attractive compared to the beginning of the year and consensus expectations are now too cautious for 2015 vs our estimates," said Riek.

"ArcelorMittal's European earnings should further improve, on our estimates and reach close to $2.9bn by 2016, fuelled by better long steel prices and improving volumes. Given the protectionism in the North American market the steel price premium is likely to disappear slower than we previously expected. Together with increasing volumes and in the absence of re-lining activities, it lifts our EBITDA forecast for the segment by $0.5bn to $2.1bn for 2015," he added. "Over the next two years, ArcelorMittal's free-cash-flow generation is about to quadruple from US$0.7bn in 2014 to US$2.9bn in 2016, on our estimates. That jump implies a FCF yield for 2016 based on the current share price of 12%, which makes the stock very attractive, in our view, as it would imply upside from a dividend perspective."

For an analyst ratings summary and ratings history on Arcelor Mittal click here. For more ratings news on Arcelor Mittal click here.

Shares of Arcelor Mittal closed at $14.02 yesterday.

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