In the final article in this series, we’ll look at Cleveland-Cliffs’ (CLF) valuation and compare it to those of its US steel peers (SLX). We’ll also look at its forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiples.
Among US (SPY) steel stocks (XME), U.S. Steel Corporation (X) and ArcelorMittal (MT) are trading at the lowest forward multiples of 3.4x and 4.1x, respectively. Cleveland-Cliffs, on the other hand, is trading at the highest multiple of 7.4x. Nucor (NUE) and Steel Dynamics (STLD) follow with multiples of 6.1x each.
CLF’s valuation multiple has expanded by 23.0% in the last month alone, primarily due to its impressive price action, as we discussed in the first part of this series. This expansion has helped narrow its valuation gap versus its last five-year historical multiple. It’s trading at a discount of 6.0% to its historical multiple versus a discount of 24.0% a month ago.
Fundamentals and value
Cleveland-Cliffs’ (CLF) fundamentals in light of improved domestic steel price environment, as well as the improved company’s prospects, commanded a higher premium. We discussed this topic in Is There a Disconnect between CLF’s Valuation and Fundamentals? Some of these fundamentals have been heeded by investors.
In that article, we noted that investors expect the steel price environment to deteriorate significantly to justify these low valuations. Over the last month, investors have reassessed their expectations. Investors may expect to see a large portion of the steel price gains to stick. While there could still be a correction in steel prices, they’re expected to remain reasonably supportive of earnings.
Cleveland-Cliffs’ earnings potential and margin accretion, which are in the form of its existing US iron ore business and its HBI (hot briquetted iron) plant, are looking the best they’ve looked in several years. While its multiple has already done some catching up with the fundamentals, the upside seems to be far from over.
Stable to slightly falling steel prices, as well as CLF’s attractive business prospects, are expected to position the company to see significant returns going forward. These prospects include its HBI plant, DR-grade (direct-reduced) facility, unique positioning, steady demand, long-term contracts, strong execution, and impressive balance sheet.
Please read Revisiting the Case: How Does Cleveland-Cliffs Look Now? for an in-depth analysis of CLF’s fundamentals and valuations.