What’s New With Cleveland-Cliffs Stock?

+31.55%
Upside
14.65
Market
19.28
Trefis
CLF: Cleveland-Cliffs logo
CLF
Cleveland-Cliffs

Cleveland-Cliffs (NYSE:CLF), a vertically integrated steel mill operator, has seen its stock decline by 7% year-to-date. The sell-off comes as steel prices have softened this year, amid easing supply chain issues, lower commodity price inflation, and a weaker-than-expected economic rebound in China following the easing of its stringent Covid-19 lockdowns. That said, the company’s operating performance has been reasonably good. Cliffs’ Q2 2023 results were better than expected. Although revenue fell by about 6% year-over-year to $5.98 billion, due to lower price realizations for steel, this was partly offset by higher volumes. Earnings stood at about $0.67 per share. The company’s total external sales volumes rose by about 15% year-over-year to 4.202 million net tons with average realized steel prices down 15% versus the year-ago period. The company is also making progress with its cost cuts, noting that it could see a $40 per ton reduction in steel costs from the second to third quarter. Cliffs has also worked through most of its higher-cost inventory while indicating that it expects to see further cost reductions into 2024 relating to lower coal prices.

Notably, CLF stock had a Sharpe Ratio of 0.4 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The automotive market – which accounts for a bulk of Cliffs’ demand – has been strong, as supply chain constraints for components and semiconductors ease. U.S. new vehicle sales, including retail as well as non-retail transactions, are estimated to grow by over 15% for August per a report by J.D. Power and GlobalData. That said, there could be a slight cooling off in automotive demand in the near term as automakers see model-year changeovers. Cliffs is also making headway in other areas such as solar projects, which are big users of galvanizing steel. The company says that this relatively new market remains the largest growth area in terms of demand.

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We remain positive on CLF stock with a valuation at about $21 per share, which is 41% ahead of the current market price. Cliffs has quite a bit going for it. The company’s cash flows could pick up, due to cost improvements and a subdued capital spending outlook. Moreover, the company has also been cutting its leverage, with net debt decreasing from $5.3 billion to $3.9 billion over the last two years. The debt load is likely to decline further, with the company indicating that it was allocating about 80% of free cash flow toward debt repayment with the rest directed toward share repurchases.  Cliffs is better insulated from any geopolitical uncertainties compared to other steel makers, given its considerable vertical integration. The company also has little reliance on imported ferrous raw materials, unlike most of its U.S. rivals. 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.

Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 CLF Return -15% -7% 79%
 S&P 500 Return -2% 18% 102%
 Trefis Reinforced Value Portfolio -4% 32% 576%

[1] Month-to-date and year-to-date as of 8/31/2023
[2] Cumulative total returns since the end of 2016

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