Cleveland-Cliffs Stock Forecast: What To Consider As We Head Into 2022
Summary
- The US steel industry is comparably clean relative to international peers. CLF uses a large amount of scrap for steel production.
- Cleveland-Cliffs will be highly profitable this year, and most likely also in 2022. Beyond that, profitability will likely not be maintained at the current, elevated level.
- CLF is not expensive and could have significant upside potential, but the industry is out of favor right now.
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Article Thesis
On the back of a recovering economy and a building boom, Cleveland-Cliffs, Inc (NYSE:CLF) and its peers from the steel industry in North America have had a strong year. Shares have performed well over the last year, but CLF and other steel players have declined considerably over the last couple of weeks. This has resulted in multiple compression that has made the stock even cheaper based on current estimates for this year, but it seems pretty clear that Cleveland-Cliffs, Inc will not be this profitable in the coming years. Still, at current prices, the company's stock is so inexpensive that it could be a solid investment for those investors that can stomach the cyclicality of the business.
CLF Stock Price
Cleveland-Cliffs, Inc has seen its shares rise from a little less than $12 to more than $26 between December 2020 and August 2021, for a highly attractive return of more than 100% in less than a year. Shares peaked in August, however, and have been trending down since then, with the sell-off accelerating over the last couple of weeks:
Cleveland-Cliffs, Inc has dropped by 24% since it hit its peak, with steel peers Nucor (NUE) and Ternium (TX) dropping by relatively comparable amounts of 17%-33% from their respective peaks. The sell-off was not based on company-specific news, but rather driven by a combination of the following factors:
- The market started to price in that profits in 2022 will likely be lower than in 2021 for steel players
- Investors that bought up shares before the infrastructure bill passage in hopes of a quick trade exited their positions again as the bill had been passed
- More recently, with the new COVID variant Omicron gaining attention, markets sold off cyclical, volatile stocks such as steel manufacturers in order to deploy their money in less cyclical safe-haven stocks.
All of these factors combined have made the shares of CLF and its peers significantly less expensive than they were during the summer months. Based on current earnings estimates, Cleveland-Cliffs trades at a very inexpensive 3.2x earnings multiple -- which tells us, of course, that it is highly unlikely that profits will remain this high in the coming years. Looking at Wall Street estimates, we see that Cleveland-Cliffs supposedly has a lot of upside potential -- the consensus price target is $30, which implies an upside potential of a little more than 50% over the next year.
A Leading Steel Player With An Attractive Portfolio
Cleveland-Cliffs, Inc is not the largest steel player in terms of market capitalization, but the company is a leading flat-rolled steel manufacturer in North America. Its operations are diversified across end markets, and the company has been working on becoming a fully integrated steel player, which means that CLF does extract some of the raw materials it needs for its steel business, but the company also is active in recycling, which includes, for example, scrap offtake agreements with its customers in the automobile industry. This, in turn, allows CLF to utilize said scrap to manufacture steel in the future:
Source: Cleveland-Cliffs presentation
In the above slide, we see what CLF calls the steel life cycle. As the number one supplier for flat-rolled steel to the US automobile industry, CLF is well-positioned to handle the scrap from these companies (oftentimes scrap offtake is included in steel sales contracts between CLF and auto players). Cleveland-Cliffs can then use the scrap the company receives for future steel manufacturing, or to process and sell it to third parties. Being able to reuse scrap to a large degree goes hand in hand with a below-average environmental impact for Cleveland-Cliffs' business on a per-ton basis, compared to steel players that utilize less scrap metal (especially in other countries with less strict pollution standards). Combined with other ESG measures, such as usage of pellets instead of sinter, this has allowed CLF and its peers to become some of the least environmentally damaging steel producers in the world:
Source: Cleveland-Cliffs presentation (linked above)
With significantly cleaner steel manufacturing in the US, compared to most other major producers, US steel companies such as CLF are in an advantaged position from an ESG perspective. They should benefit from growing demand, as customers want to buy cleaner steel, and they should also see their stocks benefit, as US steel equities are more favorable from an ESG perspective compared to steel equities from most other countries.
The longer-term growth outlook for Cleveland-Cliffs is solid, as the company will benefit from a range of megatrends that should see steel demand remain healthy. Steel is, for example, required in the build-out of renewable energy infrastructure:
Source: Cleveland-Cliffs presentation (linked above)
With massive investments in wind power, solar power, and electrical grid upgrades expected for the coming years (and likely decades), there is significant market potential for CLF and its peers. Since renewable energy buildout will, in order to meet emission reduction goals, be required no matter whether the economy is in a strong spot or not, this macro trend should result in a non-cyclical baseline demand boost, which could be a positive for the steel industry, as this has the potential to make the industry less cyclical overall. Another ESG theme that should benefit the demand picture for CLF's products is the rise of electric vehicles. CLF, as the leading steel supplier for US auto companies, believes that its technological leadership in the lightweight steel product space will benefit from growing EV adoption, as weight reduction is even more important for EVs compared to ICE-powered vehicles due to the heavy weight of the former's batteries. Since steel is significantly less emission-intensive compared to aluminum and carbon fiber (see presentation linked above), which are also too expensive for mass-market vehicles, CLF's light-weight steel offerings could be important for the EV industry, providing for an attractive market opportunity that should materialize over the coming one to two decades as the industry is moving towards EVs.
What Is The Forecast For CLF Stock In 2022?
In 2022, Cleveland-Cliffs should be highly profitable as well, although the company will not necessarily generate the huge profits we are seeing this year. Still, due to contracts for early 2022 being fixed already, and due to a special situation in the automobile industry, 2022 will be a way-above-average year. Automobile inventories are at an extremely low level right now, due to the global chip shortage and high demand:
Source: stlouisfed.org
Auto companies will be inclined to rebuild inventories over the coming quarters, which will be a positive for steel demand from the auto industry -- CLF, as the core supplier to the industry, should benefit from that.
Cleveland-Cliffs is forecast to earn around $5.30 next year on a per-share basis, which is about 15% less than what the market is forecasting for the current year (earnings per share of $6.30). If one were to put a 10x earnings multiple on that, one would arrive at a $50+ price target, but I do not deem this realistic at all. Instead, since it is expected that 2021 and 2022 will be outlier years and that profitability will be lower beyond that point, one could take a different approach.
The forecast for 2023's earnings per share is significantly lower, at $2.60. It seems more likely that profits can be sustained at that level, on average, in the future, although profitability will still see some swings over the years. If we were to put a 10x earnings multiple on that we get a share price of $26, and when we also account for above-average profitability during the current quarter and next year, we could add another $3 or so per share to get to a $29 target -- which is slightly less than, but relatively close to, the analyst consensus price target. I do believe that the high $20s level could be a realistic fair value estimate for the end of 2022, but it is, of course, far from guaranteed that this level will be reached. When we consider that CLF is still a cyclical company that experiences considerable swings in its profitability, investors may also want to adjust their fair value estimates for that.
Is CLF Stock A Buy, Sell, Or Hold Now?
Cleveland-Cliffs is, relative to peers, well-positioned in markets such as automobiles, has ESG tailwinds (compared to other steel players), and will be highly profitable in 2021 and 2022. I do believe that one can argue for a materially higher fair value compared to the current share price, and analysts also see upside potential towards $30. The industry seems to be out of favor right now, however, and with COVID worries looming, it may not be the best time to enter a position in a cyclical company such as CLF. I am neutral to moderately bullish on CLF and would rate it a Hold right now, although more risk-hungry investors may want to use the recent selloff to enter a position.
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This article was written by
Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He has been sharing his research on Seeking Alpha since 2014. Jonathan’s primary focus is on value and income stocks but he covers growth occasionally.
He is a contributing author for the investing group Learn more.Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (427)
Benzinga Newsdesk , Benzinga Staff Writer
December 28, 2021 12:53pm
competitive advantage producing iron ore
pellets and steel in North America. CLF has a
strong focus on maximizing return on invested
capital and throughout 2021 has focused on
paying down debt to continue to improve its
balance sheet. We think CLF has been proactive
with its HBI facility, a project that is generating
strong returns on investment. CLF’s acquisition
of AKS and AM USA both are accretive to EPS
and FCF per share in 2021 and beyond. These
two acquisitions strengthen CLF’s competitive
position in several markets.* Risks to our outlook include worse-thanexpected economic conditions in North America
(especially automotive OEM build rates or
nonresidential construction), lower steel prices,
and higher input costs.* Our 12-month target of $43 values CLF shares
at an EV/EBITDA of 4.0x our ‘22 EBITDA
estimate. We think the risk/reward profile is very
compelling, given its strong long-term
fundamentals, top-tier management team (with
a focus on capital discipline), and a strong
balance sheet. Unlike its peers, CLF is more
insulated from the potential impact of lower
steel prices, given 45% of its contracts are
annual fixed-price contracts.
insulated from the potential impact of lower
steel prices, given 45% of its contracts are
annual fixed-price contracts."Insulated for a year. Really need steel to find its floor around $1100 or higher.
Glad IR told them the same thing they told me on the 45% of annual contracts. :)
Just guessing based on past history. Hopefully, we will rally out of the Gate.
Wait until the world figures out that Omicron is the best thing that could happen. People are flat out being lied to and when they find out, it should make a recovery much faster. It's the last attempt to come up with a reason why people can't monitor the vote count.
