Cleveland-Cliffs’ valuation

Among major US (SPY) steel stocks, Nucor (NUE) and AK Steel (AKS) have the highest multiples of 6.3x and 6.1x, respectively. In contrast, U.S. Steel (X) and ArcelorMittal (MT) are trading at the lowest forward EV-to-EBITDA multiples of 3.8x and 4.1x, respectively. Cleveland-Cliffs (CLF) is trading between these extremes at 5.8x.

Cleveland Cliffs’ Valuation Might Catch Its Fundamentals

All of the US steel companies are trading at discounts to their five-year historical EV-to-EBITDA multiples. Cleveland-Cliffs is trading at a discount of 25% to its long-term multiple.

Macro drivers

Over the last few months, there has been one distinct factor impacting the stock prices of US steel stocks—US steel prices. However, as we discussed previously in this series, after a significant decline in the fourth quarter, steel prices have started stabilizing. Steel prices are heading into the seasonally strong first quarter. Steel is supported by inventory restocking, which should support US steel prices in the short term.

Fundamentals and value

In addition to strong support from the improving macro environment, Cleveland-Cliffs’ fundamentals are strong. The company is leaner after it disposed of all of its non-core assets. Cleveland-Cliffs’ financial condition improved a lot in the last four years. The company has started on a growth path with the construction of its hot-briquetted plant. The plant is expected to start operations in mid-2020. The plant should be a margin-accretive opportunity for Cleveland-Cliffs.

Cleveland-Cliffs stock looks cheap compared to its historical multiple and peers’ multiples. Cleveland-Cliffs’ upside seems to be far from over based on the factors discussed above. Read Is There a Disconnect between CLF’s Valuation and Fundamentals? to learn more.

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