Among US steel stocks, U.S. Steel Corporation (X) and ArcelorMittal (MT), have the lowest EV[1.enterprise value]-to-EBITDA multiples of 3.7x and 4.1x, respectively. AK Steel (AKS) has the highest multiple, 6.12x, closely followed by Nucor (NUE) at 6.09x. Cleveland-Cliffs (CLF) lies between these two extremes and 27% lower than its five-year average multiple, at 5.6x. CLF’s multiple has contracted by ~14% in the last month alone as its stock price has been impacted by economic slowdown concerns.
Fundamentals and value
CLF’s valuation needs to rise to reflect its improved fundamentals. While some of this improvement has already been priced in by the market, there appears to be room for more upside. The company’s margin accretion and earnings potential from its US iron ore (XME) business and new HBI (hot briquetted iron) plant are underappreciated by the market. As analysts consider these factors in their estimates, CLF’s valuation multiple should catch up to its improved fundamentals and the US steel industry’s macroeconomic stability. For an analysis of CLF’s fundamentals and valuation, read Revisiting the Case: How Does Cleveland-Cliffs Look Now?