Cleveland-Cliffs Inc. (CLF) became the largest flat-rolled steel company and the largest iron ore pellet producer in North America after acquiring AK steel and ArcelorMittal USA last year. Thanks to the soaring steel prices, CLF’s shares surged 212% over the past year. The company also aims to achieve net-zero debt by 2022, and its adjusted EBITDA is expected to be roughly $1.80 billion in the third quarter.

Also, the stock soared to hit its 52-week high of $26.51 on August 13, on the back of investors’ optimism surrounding the infrastructure bill. However, it has lost 24% since hitting its 52-week high and 16.5% over the past month as China has been taking steps to limit steel production. Moreover, Speaker Nancy Pelosi suggested that the U.S. House of Representatives may not vote on the $1 trillion bipartisan infrastructure bill today. So, CLF’s near-term prospects look uncertain.

Here’s what could influence CLF’s performance in the upcoming months:

Solid Financials

CLF’s top line surged 361.6% year-over-year to $5.05 billion for the second quarter ended June 30, 2021. The company’s external sales volumes for steel products came in at 4,205 net tons, up 584.9% year-over-year.

Its net income came in at $780 million in the quarter compared to a loss of $124 million in the prior-year quarter. Its EPS came in at $1.33 compared to a loss per share of $0.31 in the year-ago period. In addition, its adjusted EBITDA came in at $1.36 billion compared to a loss of $82 million in the prior year period.

Selling Shares to Fund Growth Activities

CLF announced on February 8 that it was selling 60 million of its common shares, which includes 40 million currently outstanding common shares offered by ArcelorMittal North America Holdings LLC and 20 million of its common shares. The company intended to use the net proceeds to reduce debt. However, this is expected to lead to share dilution.

Poor Profitability

In terms of trailing-12-month gross profit margin, CLF’s 15.96% is 47.4% lower than the industry average of 30.35%. Likewise, the stock’s trailing-12-month net income margin of 6.73% is lower than the industry average of 8.27%. Moreover, its trailing-12-month levered FCF margin is negative compared to the industry average of 7.89%.

POWR Ratings Don’t Indicate Enough Upside

CLF has an overall rating of C which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. CLF has a C grade for Value. This is justified as its trailing-12-month EV/S of 1.30x is lower than the industry average of 1.71x. However, its trailing-12-month P/B of 3.17x is 46.8% higher than the 2.16x industry average.

The stock has a D grade for Sentiment, consistent with analysts’ expectation that CLF’s revenue and EPS will decline 8.6% and 37.5% year-over-year to $18.60 billion and $3.66, respectively, in fiscal 2022.

CLF has a D grade for Quality, in sync with its lower-than-industry profitability ratios. Moreover, it has an F grade for Stability, consistent with its beta of 2.19.

CLF is ranked #25 out of 36 stocks in the D-rated Industrial – Metals industry. Also, click here to see the additional POWR Ratings for CLF (Growth and Momentum).

Bottom Line

Operating 46 facilities, CLF serves customers in four market categories: automotive, infrastructure and manufacturing; distributors and converters; and steel producers. Analysts expect its revenue and EPS to increase in the upcoming quarters but decrease significantly next year. In addition, it is currently trading lower than its 50-day and 200-day moving averages of $23.19 and $20.83, respectively, indicating that the stock is in a downtrend, and it could keep losing in the near term. So, it could be wise to wait for a better entry point in the stock.

How Does Cleveland-Cliffs (CLF) Stack Up Against its Peers?

While CLF has an overall POWR Rating of C, you might want to consider taking a look at its industry peers having an A (Strong Buy) rating such as Ryerson Holding Corporation (RYI), Atkore Inc. (ATKR), and Norsk Hydro ASA (NHYDY).

CLF shares were trading at $20.03 per share on Thursday afternoon, up $0.11 (+0.55%). Year-to-date, CLF has gained 37.57%, versus a 16.80% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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