How Will A Cooling U.S. Economy Impact Cleveland-Cliffs Q2 Earnings?

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Cleveland-Cliffs (NYSE:CLF), a vertically integrated steel mill operator, is poised to report its Q2 2024 results around July 23. We expect revenue to come in at $5.4 billion, marking a decline of about 12% compared to the last year, and slightly ahead of estimates. We project earnings of about $0.01 per share, just about breaking even and up from a small loss in the year-ago period. See our analysis of Cleveland-Cliff’s earnings preview for a closer look at what to expect as Cliff reports Q2 results.

Over Q1 2024, Cliff’s saw its total shipments come in at 3.94 million tons, down 3.5% compared to last year, although average selling prices improved slightly to $1,175 per ton driven by a higher mix of sales to the automotive industry. That said, things are likely to remain mixed for Q2 due to a couple of factors.  China – the world’s largest steel consumer – has been witnessing considerable weakness in its property sector with demand from other major global markets remaining mixed. China’s manufacturing activity also fell for the second month straight in June. The U.S. has also seen GDP growth cool off a bit in Q1, coming in at just 1.3%, versus an expected 1.6%. This could impact steel volumes over the quarter. That said, on the cost front, the company should see reductions relating to raw materials as well as coal and easing supply chain issues. For perspective, for the full year, the company sees steel unit cost reductions to the tune of about $30 per ton, translating into about $500 million higher adjusted EBITDA.

CLF stock has seen little change, moving slightly from levels of $15 in early January 2021 to around $15 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. Overall, the performance of CLF stock with respect to the index has been lackluster. Returns for the stock were 50% in 2021, -26% in 2022, and 27% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CLF underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Materials sector including LIN, SCCO, and RIO, and even for the megacap stars GOOG, TSLA, and MSFT.

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In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CLF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Cliffs and the broader steel industry face some headwinds due to a cooling global economy and higher steel manufacturing capacity in North America and Mexico and this could also impact pricing. That said, Cliffs should still benefit from some cost improvements and a subdued capital spending outlook. 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.  Moreover, the company has also been cutting its leverage, with its net debt over the last quarter declining to under $3 billion, meeting its target. The company has also been more aggressive with its share repurchases, buying back about 30.4 million shares, or 6% of the total outstanding stock during Q1. We value CLF stock at about $19 per share, which is about 20% ahead of the current market price. We will be updating our price estimate for the stock following Q2 earnings. 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 Jul 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 CLF Return 1% -24% 84%
 S&P 500 Return 2% 17% 149%
 Trefis Reinforced Value Portfolio 1% 8% 664%

[1] Returns as of 7/9/2024
[2] Cumulative total returns since the end of 2016

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