Why Is Cleveland-Cliffs Stock Down 30% In Six Months?

Cleveland-Cliffs (NYSE:CLF), a vertically integrated steel mill operator, has seen its stock decline by more than 30% in the last six months. This fall has been primarily due to the adverse business conditions that the industry is going through. Steel prices in the U.S. have witnessed a declining trend due to subdued domestic demand, a subdued Chinese economy, as well as weak global prices. CLF stock had fallen to its 52 week low of $10.21 in mid-September and has rebound slightly from there. In Q2 2024, CLF revenues fell by about 15% year-over-year to $5.1 billion, due to lower price realizations for steel, as well as lower volumes. Earnings stood at about $0.11 per share.

The company’s total external sales volumes fell by about 5% year-over-year to 3.98 million net tons with average realized steel prices down 10% versus the year-ago period. Having said that, the company is making good progress with its cost cuts – having met its targets in the second quarter. CLF has a full year cost cutting target of approximately $30 per ton of steel year-on-year. The cost cut is mainly due to lower coal and iron ore costs. Additionally, the company used its operating cash flows to reduce net debt levels by $237 million, bringing it down substantially.

Overall, the performance of CLF stock with respect to the index over the last 3-year period has been lackluster. Returns for the stock were 50% in 2021, -26% in 2022, and 27% in 2023.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it 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 around rate cuts and multiple wars, 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?

We remain positive on CLF stock with a valuation at about $20 per share, which is 40% ahead of the current market price. Cliffs has plans in place which assures long-term benefits. Apart from the cost cutting measures being undertaken by the company, orders from the well-performing automotive sector promises healthy cash flows. In addition, CLF is in the process of acquiring Stelco Holdings Inc., and expects to close it in the fourth quarter of 2024. This acquisition shall help to increase CLF’s flat rolled products footprint, increase geographical diversification, while adding to its margins.

Moreover, the company is focusing on deleveraging, as debt repayment is being prioritized, bringing down net debt levels by $237 million in Q2 of 2024. 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. 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.

While investors have their fingers crossed for a soft landing for the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 10/21/2024
[2] Cumulative total returns since the end of 2016

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