Will Cleveland-Cliffs Stock Move Higher Following Q1 Results?

Cleveland-Cliffs (NYSE:CLF), a vertically integrated steel mill operator, is poised to report its Q1 2024 results on April 23. We expect revenue to come in at $5.4 billion, marking an increase of about 1% compared to last year, and slightly ahead of the current market price. We project earnings of about $0.23 per share, in line with consensus estimates and up from a small loss in the year-ago period. 

Steel prices have been somewhat subdued this year. While China – the world’s largest steel consumer – saw its manufacturing pick up pace, the property sector remains weak, with demand from other major global markets remaining mixed. Over Q4 2023, Cliff’s saw its average selling prices come in at $1,093 per ton, and the company has indicated that it could see a roughly $60 per ton increase for the first quarter, driven in part by lags on index pricing. On the shipments front, the company delivered 4.04 million tons of steel over Q4 and indicated that it could see a marginal increase from these levels.  On the cost front, the company should see reductions relating to raw materials as well as coal and easing supply chain issues, although the full impact is only likely to be felt over the second quarter. For perspective, for the full year, the company sees steel unit cost reductions of about $30 per net ton, translating into about $500 million higher adjusted EBITDA for the full year.

CLF stock has shown strong gains of 35% from levels of $15 in early January 2021 to around $20 now, vs. an increase of about 30% for the S&P 500 over this roughly 3-year period. However, the increase in CLF stock has been far from consistent. Returns for the stock were 50% in 2021, -26% in 2022, and 27% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CLF underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Materials sector including LIN, SCCO, and RIO, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CLF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Cliffs has quite a bit going for it. The company’s cash flows could pick up, due to cost improvements and a subdued capital spending outlook. Cliffs is better insulated from any geopolitical uncertainties compared to other steel makers, given its considerable vertical integration. The company also has little reliance on imported ferrous raw materials, unlike most of its U.S. rivals.  Moreover, the company has also been cutting its leverage, with its net debt over the last quarter declining to under $3 billion, meeting its target. The company has also indicated that it would get more aggressive with its share repurchase. We value CLF stock at about $20 per share, which is slightly below the current market price. We will be updating our price estimate following Q1 earnings. See our analysis on Cleveland-Cliffs Valuation: Is CLF Stock Expensive Or Cheap? for more information on what’s driving our valuation for Cliffs. See our analysis of Cleveland-Cliffs Revenue for more details on the company’s key revenue streams and how they are expected to trend.

[1] Returns as of 4/21/2024
[2] Cumulative total returns since the end of 2016

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