Cleveland-Cliffs vs. Vale

by Trefis Team
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Trefis
CLF
Cleveland-Cliffs Inc.
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Cleveland-Cliffs’ stock (NYSE: CLF) price has declined by about 33% in the last three and a half years, when the stock price dropped from $8.41 at the end of 2016 to $5.60 as on 19th June 2020. That’s bad news for CLF. But wait a minute, CLF’s close rival Vale stock (NYSE: VALE) price has seen a rise of 35% during the same period. So Vale gained more than what CLF lost, despite CLF’s net income margins being higher in comparison over the last three years. Does the stock price movement then make sense? We believe it does and our dashboard Cleveland-Cliffs vs. Vale: Does The Stock Price Movement Make Sense? has the underlying numbers.

Sure, CLF’s margins are higher, but the one key element which explains the divergence in stock price movement is the revenue. Vale’s revenue has increased by 37% during the 2016-2019 period, compared to 28% growth in CLF’s revenue. An important aspect to note here is that Vale’s revenue base is almost 19x CLF’s revenue size. Despite such a huge base, it was able to achieve a superior revenue growth over recent years. This was mainly due to larger size of operations, higher production and shipments, improved quality of ores, and global operations spread across continents. The P/E of these two iron ore giants is not comparable as Vale reported a loss in 2019 and EPS turned negative. So, what along with revenue is driving a difference in stock price? It is the business diversification and near-term outlook.

How Do Core Businesses Of Cleveland-Cliffs And Vale Compare?

Let’s have a closer look at the core business prospects. Vale is a much more diversified company with global presence and with Vale’s revenue spread across commodities like iron ore, pellet, copper, nickel, and energy. On the contrary, CLF’s revenue has been completely concentrated by pellet until recently. In early 2020 it ventured in to the steel space by acquiring AK Steel, which is considered to be the weakest US steel company. This $1.1 billion all-stock deal was concluded in March 2020, coinciding with the outbreak of the Covid-19 pandemic. The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The iron ore demand from industry players affects global iron ore price levels, in turn impacting the company’s price realization for its products. Lower demand from construction players and shedding of capacity by major steel companies, mainly in China, has led to a drop in global iron ore prices recently.

Acquiring a steel company at such a time has anything but enthused the markets. Pandemic-induced lower steel demand from construction and automobile players, has led to a drop in global steel prices recently, which had already seen a drop due to the US-China trade war. Though total revenue is expected to increase from $2 billion in 2019 to $5 billion in 2020 (completely due to the acquisition), CLF’s margin is expected to drop sharply from 14.7% in 2019 to 8% in 2020, due to lower gross margins and acquisition-related costs. Thus, Cleveland-Cliffs is likely to be hit by a double whammy of slowdown in the iron ore as well as steel markets.

The decline in iron ore prices during the pandemic has been less than the steel price drop, which is expected to benefit Vale. Additionally, with the company expected to ramp up nickel production in the near term, higher demand for nickel and copper from electric vehicle makers will also help Vale. Thus, in the absence of an ill-timed acquisition, larger operational size, and better business stability and continuity, Vale is projected to outperform CLF post-Covid.

This is also reflected in the fair price estimate of these two companies. As per Vale valuation by Trefis, we have a price estimate of $11 per share for Vale’s stock, higher than its current market price. On the contrary, Cleveland-Cliffs valuation works out to $5 per share, lower than its current market price.

While Vale is likely to outperform Cleveland-Cliffs immediately post-Covid, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Additionally, for further insight in to the steel industry, find out how steel war is heating up between giants US Steel and Arcelor Mittal

 

See all Trefis Price Estimates and Download Trefis Data here

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