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Bull of the Day: Cleveland-Cliffs (CLF)

This steel stock could be a real steal at current prices.

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This story originally appeared on Zacks

Cleveland-Cliffs (CLF) is a Zacks Rank #1 (Strong Buy) that is the largest flat-rolled steel producer in North America. The Company is vertically integrated, from mined raw materials, direct reduced iron, and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling, and tubing.

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The stock had a fantastic 2020, moving from a COVID crash low of $2.63 to $15. The stock then continued higher in 2021, moving to $26.51 before pulling back to close up about 45% on the year.

The stock broke some technical support in December, but has recently reclaimed those levels. So investors are now wondering if the stock can continue its run and make it three straight years of outperformance.  

About the Company

Cleveland-Cliffs serves a range of markets where they offer flat-rolled carbon steel, stainless, electrical, plate, tinplate, long steel products, carbon and stainless-steel tubing, and hot and cold stamping and tooling.The company was founded in 1847, has about 26,000 employees and is headquartered in Cleveland, Ohio.  

CLF has a market cap of almost $11 Billion and has Zacks Style Scores of “A” in Growth and Value. The stock has a Forward PE of 4 and does not pay a dividend.  

A New Company

In recent years, the company has acquired ArcelorMittal USA and AK Steel, These moves have transformed the focus from mining iron ore to being a vertically integrated steel producer.

With that, Cleveland-Cliffs completed its Toledo Direct Reduction plant last year. This natural-gas-based plant supplies high-quality hot-briquetted iron (HBI), an environmentally friendly alternative to scrap and imported pig iron. The plant is expected to generate significant value due to the scarcity of domestic prime scrap, all while meeting the company’s greenhouse gas initiative.

Q3 Earnings

In late October, Cleveland-Cliffs reported a 4% EPS beat. Revenues also came in above expectations and the company said they believe average sales price in 2022 should be higher than last year.

Steelmaking volume came in at 4.15M v 1.12M a year ago. And EBITDA was up to $1.93B from $126M a year ago.

Management commented that the company’s business model is based on contract sales and they have already renewed annual fixed price contracts for their most important customers. They add that because they aren’t exposed to steel spot prices, they see continued growth and are positioned for strong profitability.

ClevelandCliffs Inc. Price and EPS Surprise

ClevelandCliffs Inc. Price and EPS Surprise

ClevelandCliffs Inc. price-eps-surprise | ClevelandCliffs Inc. Quote

Estimates

Estimates are actually coming down for the current quarter, which might be a reason the stock has fallen of late. However, looking over the next several quarters, things look very optimistic.

Over the last 90 days, estimates have jumped 125% higher for next quarter, moving from $1.13 to $2.54. For next year, we see a 60% jump over that same time frame.

The Technicals

Cleveland-Cliffs had some glory days back in 2007 and 2011, with the stock rising to $100 both years. However, both times the stock crashed under $20 and from 2013 on we didn’t see much life.

The stock had been dead money for almost a decade, and when COVID hit, CLF fell under $3.

The rally in the markets rewarded the CLF investors that stepped in during the panic. The stock rallied all the way to $26 last year and recently pulled back under $20.

So after all that, the stock is starting to trade in a sideways range, with resistance in the $25 area and support at the $20 level.

The moving averages are close together, with the 200-day at $21 and the 50-day at $22. I would expect sideways trading until the next quarter, but if the company can impress there is an opportunity for a large move upwards.

The halfway back from 2021 lows to highs has held well. This 50% Fibonacci retracement has given investors a place to rely on and buy. A break of that $25 resistance could bring the stock to $30 in a hurry. This would be an up move of over 30% from current levels.

Bottom Line

Investors in Cleveland-Cliffs get some value and growth in a company that has recently transformed itself. The company isn’t exposed to steel prices like most steel stocks, so if prices fall, the stock should still hold up.

While the stock might be stuck in a sideway pattern at the moment, look for it to start trending higher after earnings. Over $25 CLF should post its third straight winning year and outperform the market by a steady margin.



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