Among US (SPY) steel stocks (XME), U.S. Steel Corporation (X) and ArcelorMittal (MT) are trading at the lowest forward EV-to-EBITDA multiples of 2.5x and 3.5x, respectively. Cleveland-Cliffs (CLF), on the other hand, is trading at the highest multiple of 5.3x. Nucor (NUE) and Steel Dynamics (STLD) follow with multiples of 5.2x and 4.4x, respectively.
All these companies are trading at discounts to their trailing-five-year historical average EV-to-EBITDA multiples. Cleveland-Cliffs is currently trading at a discount of 32% to its long-term multiple.
Fundamentals and value
Cleveland-Cliffs’ fundamentals have been improving since its new management took over in 2014. Its non-core assets are sold off, with the seaborne operations being the last, which took a lot of volatility out of the stock. Its debt concerns have been laid to rest. Moreover, the company is solidly marching on its growth path with the ongoing construction of an HBI (hot briquetted iron) plant.
Its existing US iron ore business is looking good, with the favorable macro backdrop of firm steel prices and lower imports. The recent sell-off in the stock and deceleration in the multiple have mainly to do with global growth concerns, including China—but the multiple should catch up to its fundamentals.
At the current multiple, the stock is looking cheap relative to history, and the upside seems to be far from over. We discussed this outlook in Is There a Disconnect between CLF’s Valuation and Fundamentals? Investors have heeded some of these fundamentals.
Stable to slightly falling steel prices and CLF’s attractive business prospects are expected to position the company to see significant returns.
See Revisiting the Case: How Does Cleveland-Cliffs Look Now? for an in-depth analysis of CLF’s fundamentals and valuations.