Although the U.S. mini-mill companies Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD) have beaten the market over the past year, these are still tough times in steel, as stocks like U.S. Steel (NYSE:X), POSCO (NYSE:PKX), and ThyssenKrupp really have not been strong. Even though it may enjoy the reputation of being the best integrated steel company out there, that reputation hasn't helped ArcelorMittal (NYSE:MT) that much, as the stock has languished in a tough steel market. These shares do seem undervalued, but it's probably going to take more optimism about the global economy for shareholders to see the benefits.

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Some Progress In The First Quarter, But Not All That Much
ArcelorMittal's first quarter results highlight why the steel stocks are in the doldrums – while results were better than expected, it may be more accurate to say that they were less bad than feared.

Revenue fell 13% from the year-ago period, but rose about 2% sequentially and came in about 4% lower than expected. Overall shipments declined 6% from the year-ago period, and the company saw an 8% decline in overall pricing. Flat Carbon Americas was the relative outperform vis a vis expectations (with revenue down 8% and up 4%), while Flat Carbon Europe saw the biggest sequential improvement as sales increased 11%.

Margins were messy, made worse by some accounting changes and inconsistent treatment of those items by sell-side analysts. All told, I would say that ArcelorMittal beat the consensus adjusted EBITDA estimate by at least a high single-digit percentage, but EBITDA was still down sharply from the year-ago level. While the company did show sequential EBITDA improvement, it's very much worth asking whether this was due to the company's cost containment efforts or simply better volume leverage in the European flat carbon operations.

SEE: Understanding The Income Statement

Controlling What It Can
If there's good news for ArcelorMittal, it is that this is still a highly-integrated, very well-run steel company. To that end, management is looking to take out an incremental $3 billion in costs through a cost optimization program that will be completed by 2015. Only about $1 billion of this will be from fixed costs and it doesn't appear to include any permanent mill/plant closures, but it's still a very worthwhile project.

The basic problem for ArcelorMittal is the same as any commodity company, whether it's Nucor, Freeport McMoRan (NYSE:FCX), or Vale (Nasdaq:VALE) – the company can't do much of anything about end-user demand and there is always a risk of desperate competitors over-producing and running at long-term losses in the hopes of staying liquid in the short term.

ArcelorMittal represents about 20% of the steel supplied to the auto industry, and companies ranging from Honeywell (NYSE:HON) to Illinois Tool Works (NYSE:ITW) to Johnson Controls (NYSE:JCI) have all confirmed very weak unit production numbers in Europe, with North American trends starting to look a little shakier (though the chip companies have been more optimistic about North American unit volume, so who really knows...). Likewise, the significant slowdown in construction activity in Europe and North America has been a big problem for demand.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
Compared to markets like iron ore and copper, I'm a little less worried about the amount of supply that has come online in the steel industry over the last few years. So, while there may be reasons to worry about the end times of the commodity supercycle for some commodities, I'm not sure that's the case for steel. That said, ArcelorMittal's heavy exposure to Europe and North America (about two-thirds of revenue) relative to China, India, and other emerging markets (excluding Brazil, where the company has a large presence) is a concern.

ArcelorMittal has historically carried a 5.5x mid-cycle EBITDA multiple, and I'd be willing to pay a higher multiple today given that we're at a below-average level of production and profitability. While some bullish analysts are willing to go as high as 7.5x or 8x, I'm not – I assign a 6.5x multiple to ArcelorMittal's forecasted 12-month EBITDA and that suggests a fair value of about $17.50. With the shares trading at only about $13, that's appealing. Still, investors considering these shares on a value basis need to be prepared for a long wait, as sentiment is pretty firmly against the resources/materials sector today.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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