CLF Misses Q2 Earnings Estimates: Is the Stock a Buy or Sell Now?

Cleveland-Cliffs (CLF) released its second-quarter earnings on July 22. The stock fell sharply because the earnings missed estimates. CLF stock is down almost 18 percent from its 52-week highs. Should you buy or sell the stock now?

Nucor (NUE) also released its second-quarter earnings on July 22, which beat the estimates on both the top line and bottom line. Previously, Steel Dynamics posted better-than-expected earnings. Despite posting better-than-expected earnings, NUE is also trading marginally lower on July 22.

Cleveland-Cliffs reported revenues of $5.05 billion, which was slightly ahead of the $5.01 billion that analysts were expecting. The company’s EPS fell short of the estimates. The company said that it expects to post an adjusted EBITDA of $1.8 billion in the third quarter, which was below the $1.9 billion that analysts were expecting.

Cleveland-Cliffs expects to post free cash flows of $1.4 billion in the third quarter. The EBITDA-to-free cash flow bridge looks good and will help the company lower its debt. The company expects to use the free cash flows to repay its debt and expects to achieve zero net debt by 2022.

Markets are ignoring the deleveraging opportunities for U.S. steel companies. Given the strength of U.S. steel markets where companies are posting record earnings and cash flows, companies like CLF and U.S. Steel Corporation (X) have a once-in-a-lifetime chance of repaying their outstanding debt.

Lourenco Goncalves, Cleveland-Cliffs’ CEO, termed it a “monumental debt reduction” opportunity. Lower debt would help companies like X and CLF attract higher valuation multiples.

If the momentum in U.S. steel prices sustains, CLF would be able to negotiate the automotive contracts for 2022 at more favorable terms. The automotive industry is also in an upcycle and is recovering sharply from last year’s bottoms.

As the chip shortage situation improves in the second half of 2021 and beyond, CLF will be able to increase its volumes to the sector. In the second quarter of 2021, 23 percent of the company’s steelmaking revenues came from the automotive industry.

The company acquired AK Steel and ArcelorMittal’s U.S. operations. Both of these companies were among the major steel suppliers to automotive companies. Generally, shipments to automotive companies are relatively immune from imports pressure since OEMs give more weightage to quality and timeliness over prices. Also, most of the sales happen on contracts.

The plunge in CLF stock looks like a good buying opportunity. The stock trades at an NTM PE ratio of just about 3x. While the valuation multiples for cyclical companies like steel peak at the top of the cycle, CLF looks like an attractive buy.

There has been a sell-off in metals and mining companies amid concerns about higher inflation and a growth slowdown. However, there are several positive triggers for CLF stock including incremental revenues from the HBI (hot-briquetted iron) plant, deleveraging opportunities, and President Biden’s infrastructure plans.

Wall Street analysts have a bullish forecast for CLF stock. Its average target price of $29.62 implies a potential upside of over 46 percent over the next 12 months. Among the eight analysts polled by TipRanks, six rate CLF stock as a buy, while two rate it as a hold.