CLF Stock Is a Good Buy as the U.S. Steel Cycle Nears Its Peak

Cleveland Cliffs (CLF) has transformed completely over the last year or so by acquiring ArcelorMittal's U.S. operations and AK Steel. By acquiring these two significant operations, Cleveland-Cliffs has transformed into the largest integrated steel manufacturer from an iron ore pellet producer. The company is scheduled to report its earnings for the first quarter of 2021 on April 22. What is CLF's stock forecast and will it rise after the earnings?

U.S. steel demand has remained strong. End markets have started rebounding during the last few months due to pent-up demand. 

Cleveland-Cliffs is set to release its earnings for the first quarter of 2021 on April 22 before the market opens. The company has missed the earnings estimates twice in the last four quarters. While CLF’s earnings reports have been a mixed bag in the previous year, it gave investors hope with its earnings guidance. On March 30, CLF forecasted stronger earnings for the first quarter and the full year compared to analysts’ estimates.

The steel producer expects its EBITDA to come in at $500 million for the first quarter, which was nearly 28 percent higher than analysts' consensus. The new EBITDA guidance for 2021 was $3.5 billion, which also beat analysts’ consensus estimate by 21 percent. For these projections, the company assumes that U.S. HRC (hot-rolled coil) prices average $975 for the year. For the first quarter of 2021, analysts expect the company to post an EPS of $0.34 with revenues of $4.22 billion. 

According to Market Beat, CLF stock is covered by six Wall Street analysts. Three of the analysts have a hold rating, while three have a buy rating for the stock. Analysts’ consensus target price of $17.3 implies a possible downside of 3.9 percent for the stock. 

On April 9, Goldman Sachs initiated coverage on the stock with a neutral rating and a target price of $20. Goldman Sachs analyst Emily Chieng thinks that “transformational acquisitions” in 2020 give CLF a “differentiated approach” to the U.S. steel industry. However, she's waiting for more supply discipline and delivery of integration synergies to become more positive on the shares.   

On April 19, B. Riley raised CLF’s target price from $21 to $22 and maintained a buy rating.

U.S. HRC steel prices have remained buoyant in 2021 after starting their recovery in the second half of 2020. The lockdowns put pressure on the supply while demand recovered, which led to a rise in U.S. steel prices. Most end markets noted strong customer demand, which coupled with low inventories and pent-up infrastructure demand has kept U.S. steel prices buoyant. 

According to AG Metal Miner, the U.S. HRC three-month price rose 20 per month-over-month to $1,280 per short ton in April. However, it noted that the price has flattened out so far in April. It still isn't clear if we have already reached a peak, but a general consensus seems to be emerging that we are near the peak if it hasn't been reached. The capacity utilization among steel mills is rising. Companies are ramping up production to meet the demand. 

Also, the new supply is now close to coming online. Steel Dynamics is working on a new Sinton, Tex. facility, which is scheduled to open mid-year. U.S. Steel and Nucor have also announced several new projects, which will lead to more steel supply in U.S. markets and could pressure prices in the medium to long term. 

While there could be pressure on steel prices in the medium term, they’ll still remain high enough for months for steelmakers, including Cliffs to continue to earn decent earnings. Cleveland-Cliffs’ HBI (hot-briquetted iron) plant in Toledo also remains a good revenue opportunity for the company. Therefore, it's expected to continue to see positive stock momentum even after the earnings.

Nucor (NUE), Cleveland-Cliffs (CLF), U.S. Steel Corporation (X), and Steel Dynamics (STLD) are the top four steel producers in the U.S. While CLF and X mainly produce steel through blast furnaces, NUE and STLD produce steel in EAFs (electric arc furnaces). The companies operating using blast furnaces have a high fixed cost structure and they tend to outperform the companies that produce steel using EAFs during an upcycle. Currently, we are in an upcycle and therefore, it might be better for investors to look at X and CLF to play this cycle.

CLF trades at an NTM EV-to-EBITDA multiple of 4.8x, while X trades at an NTM EV-to-EBITDA of 3.3x. STLD and NUE are trading at multiples of 5.3x and 5.8x, respectively. Historically, CLF has traded at a premium to other steel plays. CLF is attractively priced even though the valuation of cyclical companies is the lowest at the peaks, which we seem to be approaching.