Forward valuation

In this article, we’ll look at Cleveland-Cliffs’ (CLF) valuation and compare it to those of its US steel peers. We’ll also look at its forward EV-to-EBITDA (enterprise value-to-EBITDA) and PE multiples.

What Would Lead to a Rerating of CLF’s Multiple?

Cleveland-Cliffs’ valuation

Among US steel stocks, U.S. Steel Corporation (X) and ArcelorMittal (MT) have the lowest forward EV-to-EBITDA multiples of 3.6x and 4.4x, respectively. Cleveland-Cliffs, on the other hand, is trading at the highest multiple of 6.3x. Steel Dynamics (STLD) and Nucor (NUE) follow with multiples of 6.0x and 6.1x, respectively.

Cliffs’ multiple has seen an expansion of 2% since it released its second-quarter results. Its stock price has risen 17% since then. Its current forward EV-to-EBITDA multiple still implies a discount of 20% to its trailing-five-year multiple. On a forward PE basis, CLF is trading at a multiple of 6.5x, implying a discount of 40%.

Fundamentals and value

As we highlighted in Is There a Disconnect between CLF’s Valuation and Fundamentals? Cliffs’ valuation needed to rise to reflect its improved fundamentals. While some of this improvement has already been priced in by the market, there could be room for more upside.

Cliffs’ earnings potential and margin accretion in the form of its existing US iron ore business and its HBI (hot briquetted iron) plant are looking the best they have looked in several years. Still, its valuation is far behind its historical multiples. There could be some catching up to do for its price and valuation so that these improvements are fully priced in.

The apparent disconnect may be due to investors being concerned about the future direction of steel prices. While some of these concerns may be valid, the market needs to give the company a bit more credit. Stable to slightly falling steel prices along with Cliffs’ attractive business prospects—including its HBI plant, DR-grade (direct reduced) facility, unique positioning, steady demand, long-term contracts, strong execution, and impressive balance sheet—are likely to have positioned the company to see significant returns going forward.

Read Revisiting the Case: How Does Cleveland-Cliffs Look Now? for an in-depth analysis of CLF’s fundamentals and valuation.

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