Valuation multiples are key metrics that investors should consider carefully. With the help of relative valuations, you can compare a company’s valuation with its closest peers’ valuations. There are several valuation metrics you can use.
For companies in cyclical industries such as steel and mining, the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric. The forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of its EBITDA.
Cliffs Natural Resources’ valuation
The chart above shows the forward EV-to-EBITDA multiples of various steel companies, some of which have captive iron ore mines. The valuation multiples of these major players have risen in the last few months. These rises are the result of price rises following Donald Trump’s US presidential win.
Companies such as U.S. Steel (X), Nucor (NUE), Steel Dynamics (STLD), and AK Steel (AKS) are trading at premiums to their long-term trading multiples. U.S. Steel and AK Steel have seen valuation reratings of 30% and 41%, respectively, since the US election.
Cliffs Natural Resources (CLF) is trading at a forward EV-to-EBITDA multiple of 12.9x, compared to its trailing-five-year average of 9.6x. Its stock price has risen 46% since the US election, while analysts’ upgrades haven’t kept the pace. Most of these positives, for the time being, seem to be priced in to the stock.
US (VTI) steel prices and seaborne iron ore prices are expected to remain the major drivers of Cliffs Natural Resources’ valuation going forward. Watch CLF’s 4Q16 results for any further updates regarding its debt reduction or its ventures into the direct reduced iron business. These could act as positive catalysts for the company’s valuation.
Meanwhile, keep checking in with Market Realist’s Iron Ore page for the latest updates.