Over 150% Rise In Cleveland-Cliffs’ Stock Possible After COVID-19 Crisis?

by Trefis Team
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CLF
Cleveland-Cliffs Inc.
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Cleveland-Cliffs (NYSE: CLF) stock is very likely to outperform the broader S&P index post coronavirus and oil price war crisis, going by the trends seen during the 2008 slowdown, where it fell 66% from the approximate pre-crisis peak in 2008, and recovered by a whopping 200% by early 2010. The decline in Cleveland-Cliffs’ stock and recovery was higher than that of the S&P 500. We compare the performance of Cleveland-Cliffs vis-à-vis the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Cleveland-Cliffs Inc. Stock Fare Compared With S&P 500?

On Monday, March 9, the stock markets saw their biggest sell off since the 2008 crisis, with the decline continuing throughout the week. There were two distinct trends driving the sell-off. Firstly, the increasing number of coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 20% after Saudi Arabia increased production. Cleveland-Cliffs’ stock fell about 40% between 8th March and 18th March 2020, and is down by a total of 56% since early February, considering the impact that the outbreak and a broader economic slowdown could have on iron ore prices and demand, and the global iron ore industry.

Moreover, though Cleveland-Cliffs’ products do not have much exposure to China, the iron ore demand from China affects global iron ore price levels to a large extent, in turn impacting the company’s price realization for its products. Lower demand construction players and shedding of capacity by major steel companies in China has led to drop in global iron ore prices recently. Additionally, with the outbreak and spread of coronavirus expected to lead to further slowdown in economic activity and demand, iron ore prices are expected to remain under pressure. However, going by the trends seen during the 2008 economic slowdown, it’s likely that Cleveland-Cliffs’ stock could bounce back strongly and potentially outperform the market as the crisis winds down. In 2008 when the stock fell 66% during the market crash, the stock recovered much better than the market at 200%. As per the current fall of 56% due to coronavirus since February (1st February 2020 to 18th March 2020), CLF’s stock could bounce back more than 1.5x from its current level once the market recovers post the crisis, with a possible stock upside of ~170%.

In this analysis we take a look at 2007-08 vs. 2020 Crisis Comparison: How Did Cleveland-Cliffs Inc. Stock Fare Compared With S&P 500?

Cleveland-Cliffs Stock versus S&P 500 Over 2020 Coronavirus/Oil Price War Crisis

  • Cleveland-Cliffs’ stock declined by about 40% between 8th March 2020 and 18th March 2020, and the stock is down by about 56% since February 1, after the WHO declared a global health emergency.
  • The S&P 500 declined by 20% between 8th March 2020 and 18th March 2020, and has fallen by 28% since February 1, after the global health emergency was declared by the WHO.
  • We also compare the current coronavirus crash to 4 other market crashes here.

Cleveland-Cliffs versus the S&P 500 During 2007-08 Financial Crisis

  • Cleveland-Cliffs’ stock declined from levels of around $38 in October 2007 (the pre-crisis peak) to levels of around $13 in March 2009 (as the markets bottomed out) and recovered to levels of about $39 in early 2010.
  • Through the crisis, CLF stock declined by as much as 66% from its approximate pre-crisis peak. This marked a sharper decline than the S&P which fell by as much as 51%.
  • However, the stock recovered strongly, rising by 200% between March 2009 and January 2010. In comparison, the S&P rose by about 48% over the same period.

Impact on Interest Coverage

  • With a 15% drop in CLF’s revenues in 2019, the company’s interest coverage ratio deteriorated from 5.7x in 2018 to 4.3x in 2019. With continued lower customer demand, the metric was earlier expected to go further down to 3.1x in 2020.
  • However, the spread of coronavirus across the globe has led to a drop in iron ore prices in 2020. Additionally, lower industrial activity and demand is likely to lead to a fall in revenue for major iron ore miners.
  • Our analysis shows that a 10% drop in projected revenues along with lower margins would lead to a 38% drop in the estimates for interest coverage ratio over the next two years.
  • With a drop in revenue and margins due to coronavirus, CLF’s interest coverage is expected to be 1.9x and 2.1x in 2020 and 2021, respectively, compared to earlier projection of 3.1x and 3.4x for the next two years.
  • Thus, the virus is likely to lead to CLF’s interest coverage ratio to halve in 2020.

Conclusion

While Cleveland-Cliffs’ stock has declined due to the Coronavirus/Oil Price War crisis, going by trends seen during the 2008 slowdown, it’s likely that it could bounce back strongly and potentially outperform as the crisis winds down.

For more detailed charts and a timeline of the 2008 and 2020 crisis for different stocks, view our interactive dashboard analyses on coronavirus.

 

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