Why We Are Raising Our Price Estimate For Cleveland-Cliffs Despite A Weak Q4

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Upside
20.22
Market
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Cleveland-Cliffs

Cleveland-Cliffs (NYSE:CLF) posted a weaker-than-expected set of Q4 FY’22 results on Monday on account of a decline in average realized prices for steel and elevated input costs. While the company’s total revenue fell by about 5% year-over-year to $4.9 billion, net losses stood at $0.41 per share. CLF’s total external sales volumes rose by about 13% year-over-year to 3.84 million net tons, although the average realized prices for steel were down by 19%.

That said, the company’s outlook actually looks pretty good. Cleveland-Cliffs expects its shipments to pick up this year, rising to about 16 million tons, up from 14.8 million tons in 2022. Although steel prices are likely to remain below average levels seen in early 2022, following Russia’s invasion of Ukraine, prices are likely to look up compared to the fourth quarter. Cliff’s previously said that it had fixed prices at about $1,400 per ton for 2023, up from $1,300 per net ton in 2022. These contracts are expected to account for roughly 7 million tons of the total 16 million tons the company expects to sell this year. Input costs could also trend lower. The company noted that it achieved an $80 per ton sequential reduction in unit costs during Q4, and anticipates a further sequential decline of $50 per ton during Q1 2023 with further reductions in the coming quarters as well. Overall the company anticipates that steelmaking costs will decline by approximately $2 billion in 2023 versus 2022, normalized for volumes.

The macro environment is also not as bad as previously feared. The U.S. Fed has also eased the pace of its interest rate hikes given slowing inflation. This could also bode well for the broader economy and commodity players such as Cliffs. China – the top steel consumer -has scrapped its stringent zero-Covid policy and the big reopening of the Chinese economy should result in rising demand, supporting global steel prices. The automotive market could also pick up, driven by improving component supply and this could help Cliffs considering that it is a major producer of flat-rolled steel products.

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Cliffs is better insulated from any geopolitical uncertainties compared to other steel makers, given its considerable vertical integration. The company’s leverage is also quite manageable, with long-term debt declining to $4.2 billion from around $5.2 billion in the year-ago quarter. We have raised our price estimate for CLF stock from about $19 per share to $24 per share, which is roughly 20% ahead of the current market price. See our analysis on Cleveland-Cliffs Valuation: Is CLF Stock Expensive Or Cheap? for more information on what’s driving our valuation for Cliffs. See our analysis of Cleveland-Cliffs Revenue for more details on the company’s key revenue streams and how they are expected to trend.

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Returns Feb 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 CLF Return -4% 27% 143%
 S&P 500 Return 1% 8% 85%
 Trefis Multi-Strategy Portfolio 0% 12% 252%

[1] Month-to-date and year-to-date as of 2/14/2023
[2] Cumulative total returns since the end of 2016

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