Why CLF Stock Fell after Its Q4 Earnings Release

• Cleveland-Cliffs (NYSE:CLF) released its fourth-quarter earnings on February 20. The stock closed with losses on February 20 and 21. AK Steel (NYSE:AKS) also fell on both days. The Cleveland-Cliffs and AK Steel merger received regulatory approvals. The merger will likely be completed next month.
• So far, Cleveland-Cliffs and AK Steel stock have fallen lmost 15.0% year-to-date based on the closing prices on February 21.

Cleveland-Cliffs reported its fourth-quarter earnings on February 20 before the markets opened. The company generated revenues of $534 million in the quarter compared to $696 million in the fourth quarter of 2018. Fewer shipments and a lower realized price per ton contributed to the lower revenues. Notably, US steel production fell in the fourth quarter. AK Steel, which is on of CLF’s top two customers, reported a 9.3% yearly fall in its fourth-quarter flat-rolled steel shipments. General Motors’ strike and an overall tepid demand environment resulted in fewer shipments for AK Steel. The Cleveland-Cliffs and AK Steel merger received regulatory approval. The merger will likely be completed next month after shareholder approval.

CLF stock fell 5.4% on Thursday and 1.4% on Friday. Overall, it is down almost 15.0% for the year. While its fourth-quarter earnings were better than expected, it missed topline estimates. After the earnings release, JP Morgan lowered CLF’s target price from $8.5 to $8.0. On an aggregate, analysts have given a mean consensus price target of $8.18 to CLF, a potential upside of 15.4% over its current prices. Three analysts have given it a “buy” or higher rating while one analyst has a “sell” rating on the stock. The remaining five analysts polled by Thomson Reuters on February 23 have rated CLF stock as a “hold” or equivalent.

Cleveland-Cliffs expects to generate an adjusted EBITDA of $550 million–$575 million in 2020. The company generated an adjusted EBITDA of $525 million last year. CLF’s 2020 guidance assumes iron ore prices of $90 per metric ton, steel prices of $650 per short ton, and pellet premium of $50 per metric ton. Notably, while iron ore prices are in the ballpark, spot HRC (hot-rolled coil) prices are currently below $600 per short ton. If US HRC prices stay at these levels, it would be a downside risk to CLF’s 2020 guidance. The guidance is for standalone Cleveland-Cliffs and doesn’t account for the pending merger with AK Steel.

Last year, while CLF announced the merger with AK Steel, it sounded optimistic about AK Steel’s Ashland Works plant. Cleveland-Cliffs said that the plant, which AK Steel closed permanently last year, could be used to produce pig iron. However, during the fourth-quarter earnings call, CLF CEO Lourenco Goncalves didn’t sound optimistic about the project. He said, “Ashland, at this point, is in the back burner. I don’t believe the market needs Ashland.” However, he added, “The market definitely leads our HBI.” Notably, CLF’s HBI (hot briquetted iron) plant will come online this year. The company expects the plant to generate an EBITDA of $30 million this year and $200 million next year.