Instead of an investment thesis
I was covering Cleveland-Cliffs Inc. (NYSE: CLF) shares since June 2021 and I have been bullish on the stock market all along for many reasons. The last time – in June 2023 – I argued for severely undervaluing the company in light of its excellent projected growth rates in FY2024-25 and implied multiples that are well below those of its peer group. Since then, CLF has significantly outperformed the broad market, returning ~27%:
And based on what I'm seeing today, my thesis hasn't changed: I still see a higher CLF stock price over the next few years, making it a great long-term “buy” today.
In the third quarter of fiscal 2023, Cleveland-Cliffs reported revenue of $5.6 billion, with adjusted EBITDA of $614 million and GAAP EPS of $0.52. Despite the UAW the strike affected 3 automotive clients, total deliveries reached 4.1 million net tons, a quarterly record for steel deliveries to the automotive sector. At the same time, CLF's cost reduction performance was strong, improving by $31 per net ton in Q3. Thus, although year-on-year sales growth stagnated, margins increased significantly during the period:
As a result, CLF beat the lower consensus forecast:
The firm's free cash flow for the quarter was $605 million, which was used primarily to repay ABL, reducing net debt to $3.4 billion and increasing total liquidity to $4.4 billion. Thus, CLF's debt decreased further in the third quarter and the debt-to-EBITDA ratio fell below 2x:
The company's capital structure now consists primarily of low-cost, fixed-coupon debt instruments with no upcoming maturities until 2026. Since the December 2020 acquisition of ArcelorMittal USA, CLF has reduced net debt by nearly $2 billion and eliminated $3.5 billion in pension and OPEB liabilities. .
In addition to reducing debt, CLF repurchased 3.9 million shares and returned ~$60 million to shareholders. That's ~0.56% of today's market cap, but I believe that's a temporary number as the company becomes more flexible with share buybacks as it reduces its debt load.
During the third quarter of fiscal 2023, Cleveland-Cliffs was able to maintain strong average selling prices above $1,200 per ton. Cost reductions are now expected to continue, according to management's comments during the last earnings call, with an additional $15 per net ton cut for Q4.
CLF has also emphasized its position in the automotive market and emphasized excellence in meeting customer needs. They expect total 4Q shipments to remain at ~4 million tct even if the UAW strike persists. The impact of the strike on CLF appears to be less significant than previous issues such as microchip shortages and other supply chain issues.
The company's commitment to purchase a significant portion of production from the Clean Hydrogen Center in northwest Indiana helped ensure placement in October 2023.
As for the failed purchase of United States Steel ( X ) , which will eventually be sold to Japan's Nippon Steel ( OTCPK:NPSCY ), CLF shareholders actually benefited from the outcome: The company won't have to take on more debt, which would further reduce the prospects for earnings growth shareholders for an indefinite period. Call me short-sighted, but as a shareholder in the company, I want it to get out of debt as soon as possible while the economy is still strong. The merger with X could have come at a bad time, destroying shareholder value and making CLF more vulnerable in a possible turbulent economic period (that would be a high-stakes consequence anyway; it's a matter of timing, I think).
Now, the company can continue to raise steel prices without any additional burden, as it did again recently, to maintain margins and benefit from the still-low US auto inventory, which will need to be replenished anyway.
CLF, which has one of the dominant roles in the automotive-focused steel industry, is still almost as cheap as when I looked at it in June 2023. Yes, the FY2025 P/E ratio looks higher than before, but EPS Growth Forecasts they predict stagnation for the given year.
I can't agree with this consensus, as the company's debt should continue to decline and buybacks should increase until then, both of which have a positive impact on EPS on a year-over-year basis.
Risks to consider
I want everyone reading this article to keep in mind that investing in CLF stock carries several risks that must be carefully considered. First, market risk is pervasive because the value of a stock depends on general market conditions and geopolitical events. Because CLF is linked to the steel and iron industry, investors are exposed to industry-specific issues such as demand fluctuations, iron ore price fluctuations and competitive pressures. Financial stability and management effectiveness also contribute to the risk profile, while factors such as debt and operational issues can affect stock performance. Commodity price risk is a key factor as CLF operates in mining and steel production. Fluctuations in global commodity prices can therefore have a significant impact on a company's revenue and profitability, which represents an additional uncertainty for investment. Regulatory and political risks at the national and international levels may also have a negative impact on CLF's business activities.
Despite all the risks, CLF stock is still one of my favorite companies in the industry. The company is recovering in seemingly tough times and with plenty of headwinds. So just think about the potential that society can have in quiet times.
I also think the stock price is still cheap. As investors say, it's still a “good deal” and don't be put off by some high TTM multiples, as FWD multiples show a very different picture. From all this, I conclude that it still makes sense to hold CLF in a long-term portfolio and continue to buy at the current price level, even if it is up +24.5% year-to-date.
Good luck with your investments!
Editor's note: This article discusses one or more securities that are not traded on a major U.S. stock exchange. Please be aware of the risks associated with these shares.