Independent iron-ore mining company Cleveland-Cliffs Inc. (CLIFF) operates through two segments: Mining and Pelletizing, and Metallics. Its stock hit a seven-year high yesterday, reaping the benefits of a big surge in iron ore prices last year.
CLF has gained 416.5% over the past year and 23.7% over the past three months, bolstered by bullish industry sentiment, strong guidance for the first quarter of 2021, and its acquisition of the U.S. operations of ArcelorMittal. However, we think it likely that the stock may pull back in the near term.
Since steel supply is expected to catch up quickly with demand, as mills ramp up their capacity, it seems inevitable that steel prices will decline soon. As a supplier to steel producers, this could affect CLF’s profitability and cash flow. Indeed, growing input costs could also put pressure on the company’s cash balance in the near term.
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Here’s what we think could influence CLF’s performance in the near term:
Steel Price Rise Could be Short-Lived
Steel prices have been increasing since last year, due to a supply shortage caused by a prolonged COVID-19-pandemic-induced economic downturn and higher demand from various sectors of the economy. However, the price surge is expected to lose steam in the near term. As steel mills restart their operations at full scale, production is expected to ramp up at a rapid pace to meet the robust demand. Furthermore, higher input costs could also affect CFL’s profitability. The company has made a foray into the steel space and is expected to lose its momentum soon as steel prices start falling.
Unfavorable Analyst Estimates
Analysts expect CLF’s revenue to decline 8.5% in its fiscal year 2022. Also, its EPS is expected to decline 52.5% next year. Furthermore, the stock failed to beat the Street’s earnings estimates in two of the trailing four quarters.
Lower Profitability
CLF’s trailing-12-month gross profit margin of 8.9% is 69.1% lower than the industry average 28.8%. Also, the company’s negative net income margin and levered free cash flow margin compare with positive industry averages. Also, CLF’s trailing-12-month ebit margin of 4.2% is 56% lower than the industry average 9.6%.
Premium Valuation
In terms of trailing-12-month ev/ebitda, CLF is currently trading at 31.08x, 168.6% higher than the industry average 11.57x. Its trailing-12-month ev/ebit of 73.25x is 281.5% higher than the industry average 19.20x.
The company’s trailing-12-month ev/sales and price-to-book multiples of 3.11 and 4.60, respectively, are also significantly higher than industry averages.
POWR Ratings Reflect Bleak Prospects
CLF has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, CLF has a B grade for Momentum, which is consistent with its increase in price over the past year.
It has a C grade for Value, which justifies the company’s stretched valuation. In addition, CLF has a D grade for Quality. This is justified given the company’s lower-than-industry profitability ratios.
CLF is currently ranked #30 of 42 stocks in the D-rated Industrial – Metals industry. In addition to the grades we’ve highlighted, one can check out CLF’s POWR Ratings for Sentiment, Stability, and Growth here.
If you’re looking for better stocks in the Industrial - Metals industry with an Overall POWR Rating of A or B, you can access them here.
Bottom Line
CLF has been benefiting from strong industry tailwinds, key acquisitions, and strong quarterly earnings, which t justify its impressive price performance over the past year. However, since steel prices are expected to witness a decline in the near term, CLF’s profit margin is likely to narrow. . Furthermore, a stretched valuation and lower profitability could lead to a price pullback by the stock very soon. So, we think it's wise to avoid the stock now.
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CLF shares were trading at $18.81 per share on Tuesday morning, down $0.58 (-2.99%). Year-to-date, CLF has gained 29.19%, versus a 9.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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