Forward valuation multiples
In the previous parts of this series, we’ve looked at the supply-demand dynamics in the US steel market as well as the seaborne iron ore market. In this part, we’ll discuss how markets are valuing Cleveland-Cliffs’ (CLF) stock versus its peers as we head into 2018.
For this purpose, we’ll use the EV-to-forward EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple. This multiple helps compare companies with varying capital structures.
Discount to historical multiples
Among the US steel and iron ore peers, Nucor (NUE) is trading at the highest forward multiple of 7.7x. Cleveland-Cliffs isn’t far behind with a multiple of 7.5x. U.S. Steel (X), on the other hand, has the lowest forward multiple of 5.6x.
Steel Dynamics (STLD), AK Steel (AKS), and ArcelorMittal (MT) are currently valued at 7.5x, 7.1x, and 5.4x of their respective one-year forward EBITDAs. All these companies except AKS are trading at discounts to their last five-year average historical multiples. Cleveland-Cliffs is trading at the highest discount of 17.7% from its US (SPY) (SPX) steel peer group.
Cleveland-Cliffs (CLF) downgraded its earnings guidance multiple times in 2017, which led analysts to downgrade their forward earnings estimates for the company. Its EBITDA estimates have been revised downward by 10.3% from the end of September.
While higher US imports and reduced customer nominations have impacted Cleveland-Cliffs’ stock and valuation negatively in 2017, several factors can provide upside to the company’s stock. One such factor is the potentially positive outcome of the Section 232 probe into the US steel imports.
As for the company-specific factors, the announcement regarding further steps on its HBI (hot-briquetted iron) plant could lead to an upside. Investors will be keenly watching Cleveland-Cliffs’ 4Q17 and 2017 results due in February 2017 for positive catalysts.