Cleveland-Cliffs stock (NYSE: CLF) has declined by about 38% year-to-date, underperforming the S&P 500 which has declined by about 24% over the same period. The stock also remains down by about 58% from all-time highs seen in March. Commodity and cyclical stocks have faced pressure in recent months due to a host of macroeconomic factors. Inflation has remained stubbornly high, causing the Federal Reserve to continue with its plan of aggressive rate hikes despite the fact that the U.S. economy contracted over the last two consecutive quarters. This is making investors less optimistic about the near-term demand prospects for industrial commodities. However, Cleveland-Cliffs’ performance has actually been pretty strong in recent quarters. For the first six months of 2022, Cleveland-Cliffs Revenue rose 35% year-over-year to $12.3 billion, while adjusted EBITDA was up 38%. The strong results were driven by higher steel price realizations and following the Russian invasion of Ukraine which hurt the global steel supply, given that both countries are key players in the global steel value chain.
So is CLF stock a buy at the current market price of about $14 per share? CLF stock presently trades at just about 3.5x consensus 2022 earnings. Although the markets typically value cyclical stocks with a low multiple when they think that earnings are near a near-term peak, we think that CLF stock appears cheap for a couple of reasons. CLF is better positioned than most other steel producers in the currently weak macro environment. Over the last few years, the company has transitioned from being a supplier of iron ore into a vertically integrated steel mill operator with a strong presence in flat-rolled steel products, making it one of the largest automotive steel producers in the U.S. While automotive production has been weighed down by the semiconductor shortage and supply chain constraints through the Covid-19 pandemic, there are signs that things could be getting better. This should potentially help drive automotive sales volumes higher, helping suppliers such as Cleveland-Cliffs. Separately, Cliffs is also better insulated from input cost pressures and geopolitical uncertainties compared to other steel markets, given its considerable vertical integration. The company mines its own iron ore and has the largest pellet-making operations in the United States. The company is also now the largest recycler of steel scrap following a recent acquisition. The company’s leverage is also very manageable, with debt standing at just about $4.5 billion during the most recent quarter, translating into debt to EBITDA multiple of just about 1x.
We value CLF stock at about $21 per share, which is about 50% ahead of the current market price. See our analysis on Cleveland-Cliffs Valuation: Is CLF Stock Expensive Or Cheap? for more details.
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 Month-to-date and year-to-date as of 9/28/2022
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