What Could Drive Cleveland-Cliffs’s Valuation Higher
Forward valuation multiples
In comparing Cleveland-Cliffs’s (CLF) and other US steel companies’ (SLX) EV-to-forward EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples, Nucor (NUE) is trading at the highest multiple of 7.1x, while ArcelorMittal (MT) has the lowest multiple of 4.9x.
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Discount to historical multiples
All stocks are currently trading at a discount to their average multiple over the last five years. Cleveland-Cliffs and U.S. Steel Corporation (X) are trading at the highest discount, at multiples of 5.5x and 5.0x, respectively, implying a discount of 41.4% for each. AK Steel (AKS), on the other hand, is trading at the lowest discount, at 16.2%.
Cleveland-Cliffs is trading at a forward multiple of 5.5x, a 7.7% discount to peers’ average multiple. The company’s valuation multiple has fallen ~15% since it released its 2Q17 results. This decline is mostly because Cleveland-Cliffs downgraded its 2017 earnings guidance once again in 2Q17. Analysts are most likely adjusting their estimates to be more in line with Cleveland-Cliffs’s earnings expectations. An early and favorable outcome for the Section 232 probe would be a positive catalyst for Cleveland-Cliffs and its US peers (SPY) (SPX).