Cleveland-Cliffs vs. United States Steel: Which Stock is a Better Investment?

Cleveland-Cliffs Inc. (CLF) in Cleveland, Ohio, and Pittsburgh, Pa.-based United States Steel Corporation (X) are two leading producers of steel and steel products in the United States. CLF is vertically integrated from mined raw materials and direct reduced iron to primary steelmaking and downstream finishing, stamping, tooling, and tubing. It serves automotive, industrial, and manufacturing industries, and steel producers by offering flat-rolled steel products, custom-made pellets, and hot briquetted iron (HBI). X, in comparison, is an integrated steel producer that sells steel products, including flat-rolled and tubular products, railroad services, and real estate operations, primarily in North America and Europe. It serves automotive, construction, consumer, electrical, industrial equipment, and service center/distribution markets.

Amid surging demand due to the resumption of infrastructure and construction activities worldwide, China’s decision to cut steel production and exports has created a global supply crunch. Thus, steel prices have been soaring. Also, a bipartisan infrastructure bill in the U.S. Congress, if passed, should drive the demand for steel over the next few years and benefit domestic companies significantly. The global IF Steel market size is expected to grow at 5.3% CAGR to $61.48 billion by 2025. So, both CFL and X should benefit.

But while the shares of X have declined 3.2% in price over the past six months, CLF has surged 20.4%. CLF is a clear winner with 184.2% gains versus X’s 155% returns over the past year. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

Yesterday, CLF agreed to acquire Ferrous Processing and Trading Company (FPT), one of the largest processors and distributors of prime ferrous scrap in the United States, for approximately $775 million. The acquisition, which represents 15% of the domestic merchant prime scrap market, will enhance CLF’s ability to buy back prime scrap directly from its clients and improve its margin contribution from scrap. Thus, the move gives CLF a good entry into the scrap business.

On September 16, X announced that it was conducting an exploratory site selection process to build a new three-million-ton mini mill flat-rolled facility in the United States. Combining two state-of-the-art electric arc furnaces (EAF) with differentiated steelmaking and finishing technology will expand X’s ability to produce the next generation of highly profitable proprietary sustainable steel solutions, marking significant progress toward its 2050 net carbon emissions target.

Recent Financial Results

CLF’s revenues for its fiscal second quarter, ended June 30, 2021, increased 361.6% year-over-year to $5.05 billion. The company’s operating income was $1.07 billion, compared to a $208 million loss in the prior-year period. Its net income came in at $780 million, versus a $124 million loss in the year-ago period. Its EPS was $1.33 for the quarter, compared to a $0.31 loss per share in the prior-year period. The company had $73 million in cash and cash equivalents as of June 30, 2021, down 34.8% from its fiscal year ended December 31, 2020.

For its fiscal third quarter, ended June 30, 2021, X’s net sales increased 140.3% year-over-year to $5.03 billion. The company’s adjusted EBITDA came in at $1.29 billion for the quarter, compared to a $264 million loss in the prior-year period. Its adjusted net earnings were $964 million versus a $469 million loss per share in the year-ago period. Its adjusted loss per share came in at $3.37, versus a $2.67 loss in the prior-year period. As of June 30, 2021, the company had $1.33 billion in cash and cash equivalents, down 33% from its fiscal year ended December 31, 2020.

Past and Expected Financial Performance

CLF’s revenue and total assets have grown at CAGRs of 86.5% and 79.8%, respectively, over the past three years. The company’s EBITDA has grown at a CAGR of 56.8% over the past three years.

Analysts expect CLF’s EPS to increase 1373.9% year-over-year in the current year and decline 32.1% next year. Its revenue is expected to increase 281.6% year-over-year in the current year and decline 7.9% next year. Analysts expect the stock’s EPS to grow at a 27.4% rate per annum over the next five years.

In comparison, X’s revenue and total assets have grown at CAGRs of 1.1% and 16.9%, respectively, over the past three years. The company’s EBITDA has grown at a 15.3% CAGR over the past three years.

Analysts expect X’s EPS to increase 393.6% year-over-year in the current year and decline 45.4% next year. Its revenue is expected to grow 105% in the current year and decline 8.4% next year. The stock’s EPS is expected to grow at an 8% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, CLF is currently trading at 3.55x, which is 135.1% higher than X’s 1.51x. In terms of forward EV/Sales, CLF’s 0.81x compares with X’s 0.51x.

Profitability

X’s trailing-12-month revenue is almost 1.1 times higher than CLF’s. However, CLF is more profitable, with an 18.6% EBITDA margin versus X’s 13.9%.

Also, CLF’s 34.3%, 8.6%, and 14.6% respective ROE, ROA, and ROTC values compare with X’s 19.1%, 5.2%, and 7%.

POWR Ratings

Both CLF and X have an overall C grade, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.  

Both CLF and X have B grades for Growth, consistent with their impressive year-over-year earnings growth. CLF’s revenue has increased 411.3% from the prior-year period, while X has witnessed 26.6% revenue growth over the past year.

X has an A grade for Value, which is consistent with its lower-than-industry valuation ratios. The company has a 0.98x trailing-12-month Price/Book, which is 54.4% higher than the 2.16x industry average. However, CLF’s C grade for Value reflects its higher-than-industry valuation. CLF’s 3.32x trailing-12-month Price/Book is 53.5% higher than the 2.16x industry average.

Of the 33 stocks in the A-rated Steel industry, X is ranked #27. CLF is ranked #22 of 35 stocks in the D-rated Industrial - Metals industry.

Beyond what we’ve stated above, our POWR Ratings system has also rated CLF and X for Quality, Momentum, Stability, and Sentiment.  

Get all CLF ratings here. Also, click here to see the additional POWR Ratings for X. 

The Winner

Because the steel industry’s long-term growth prospects look good, both CLF and X should benefit. However, considering their current fundamentals, we think it’s wise to wait for better entry opportunities in these stocks.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial - Metals industry, and here for those in the Steel industry.

Click here to check out our Industrial Sector Report for 2021

CLF shares were trading at $21.98 per share on Tuesday afternoon, up $0.52 (+2.42%). Year-to-date, CLF has gained 50.96%, versus a 17.59% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

More...