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Cleveland-Cliffs Stock Rises on Earnings Beat — Is It a Buy?

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Cleveland-Cliffs reported its third-quarter results on Oct. 23 before the markets opened. Cleveland-Cliffs’ earnings beat market expectations. What helped Cleveland-Cliffs beat the market? We'll discuss the third-quarter highlights and the company's outlook. 

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When did Cleveland-Cliffs’ report its earnings?

Cleveland-Cliffs reported its third-quarter earnings on Friday, Oct. 23 at 7:00 a.m. ET before the markets opened. The company will hold the earnings call with analysts to discuss the results at 10:00 a.m. ET. Steel Dynamics kicked off the earnings season for the U.S. steel sector. Cleveland-Cliffs has already reported losses in the previous two quarters of the year. U.S. steel prices have remained weak. The prices have fallen to multi-year lows during the year due to the COVID-19 induced slowdown. 

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Highlights from Cleveland-Cliffs' earnings report

Cleveland-Cliffs reported an EPS of -$0.04, which is a beat compared to analysts’ estimate of a loss of $0.10 per share. The company reported revenues of $1.64 billion, which were also higher than the consensus estimate of $1.6 billion.  

In the press release, Cleveland-Cliffs chairman and CEO Lourenco Goncalves said, “Our strong third quarter results reflect the positive outcome of the actions we took in Q2, when we saw opportunity when others were paralyzed.” The company restarted some of its factories, idled due to the coronavirus pandemic, sooner than expected. Cleveland-Cliffs benefited as the demand for iron ore and steel recovered sequentially in the third quarter. Goncalves said, “As a direct consequence of that, we generated $150 million in free cash flow during the quarter.”

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How did Cleveland-Cliffs' stock price react to its earnings?

Cleveland-Cliffs’ stock price has lost 1.5 percent year-to-date. Most of the decline is due to the weakness in US steel prices at a time when other commodity prices like copper have remained buoyant. On Oct. 23, Cleveland-Cliffs' stock price gained 3.5 percent and closed at $8.27. Even in pre-market trading on Oct. 23, the stock was trading 5.7 percent higher at $8.7 at 8:36 a.m. ET. Investors will be waiting for management's comments from the call to get an idea about the company's outlook.

Why did Cleveland-Cliffs suspend dividends?

Cleveland-Cliffs, like many other metal and mining companies, suspended dividends in April as the impact of the coronavirus pandemic became clearer. The company announced a dividend of $0.06 in February 2020, which was paid in April. Cleveland-Cliffs noted in April that suspending dividends is a way to provide liquidity cushion at a time when its end-markets, include the auto sector, have been impacted negatively.

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Cleveland-Cliffs' stock forecast

According to Yahoo Finance, nine analysts cover Cleveland-Cliffs stock. Among the analysts, two recommend a buy, five recommend a hold, and two recommend a sell. The consensus rating for Cleveland-Cliffs stock is a hold. Analysts are waiting on the sidelines for the demand environment to recover fully before they turn more positive on the stock. The consensus target price is $6.14, which implies a downside of 26 percent compared to Cleveland-Cliffs' current stock price.

While analysts' consensus seems to be bearish for Cleveland-Cliffs stock, you should consider that the weakness is mainly due to reasons that the company can’t control. Management has done a tremendous job turning around the company's fortunes. At one point, Cleveland-Cliffs was close to bankruptcy. The company has turned from a pure-play iron ore pellet provider to an integrated steel mill. Cleveland-Cliffs acquired AK Steel earlier this year. In September, the company announced the acquisition of ArcelorMittal’s U.S. assets. 

Even in the current downturn, management planned ahead and prepared the company's inventories and plants to take advantage of the situation when demand recovers. The demand has started recovering. There are fears about a second wave in the COVID-19 pandemic, which could derail the recovery. However, in the longer run, the company knows how to maneuver, which could be a winner for the stock in the long term. 

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