Stock Analysis & Ideas

Will Cleveland-Cliffs Stock Fall from its Cliff?

Steel maker Cleveland-Cliffs (CLF) has been caught up in the meme craze, grabbing the interest of retail traders.

On June 21, its shares increased almost 3% to close at $20.87. The stock has rallied 265.5% over a year and jumped 44.7% year-to-date.

Cleveland-Cliffs has a diversified product portfolio and is betting on higher steel and iron ore prices. The buyout of AK Steel and ArcelorMittal USA has helped the company to become the largest flat-rolled steel producer in North America.

With a market capital of $10.4 billion, Cleveland-Cliffs shares have gained 12.5% in the past month, and 50.9% over the past six months. (See Cleveland-Cliffs stock chart on TipRanks)

Rising Steel Price – A Catalyst

The U.S. steel prices have recovered strongly and hit record levels, after plunging to pandemic-induced multi-year lows in August 2020.

Per a report from Statista, the benchmark hot-rolled coil (“HRC”) prices were projected to be around $555 per metric ton in 2021, representing a surge of 15%. The report states that United States is among the markets where hot-rolled coil (HRC) steel prices are the highest in the world.

Cleveland-Cliffs remains well-positioned to gain from the growing steel prices.

Strong Q1 Results

The company reported first quarter revenues of $4.05 billion, considerably higher than $385 million reported in the year-ago quarter.

Earnings with one-time charges came to $0.07 per share in the first quarter against a loss of $0.18 per share in the prior-year quarter.

Cleveland-Cliffs will release its Q2 earnings results before the U.S. market open on July 22.

Sound Liquidity Position

Along with solid earnings results, Cleveland-Cliffs ended the first quarter with $110 million of cash and cash equivalents with total liquid assets of approximately $1.8 billion.

Given the consistent and strong cash flow generation, on May 27, Cleveland-Cliffs management announced its plans to pay off the full outstanding amount of $396 million senior notes, which stands due in March 2025. The notes are expected to be redeemed with the company’s available liquidity.

The company aims to attain zero net debt, and redemption of these notes marks the first step of the company’s mission to deleverage its balance sheet.

Analysts’ Views

The Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 5 Buys and 3 Holds. The average CLF analyst price target of $28.65 implies 37.3% upside potential from the current levels.

On June 16, Merrill Lynch analyst Timna Tanners reiterated a Buy rating on the stock and increased the price target to $30.00 from $29.00. This implies 43.8% upside potential to current levels.

The analyst raised her 2021-2023 U.S. steel price forecasts amid the ‘great steel squeeze.’ She now expects HRC steel prices to reach an average of $1,075 in the second half of 2021 and $600 in 2022.

On June 16, J.P. Morgan analyst Michael Glick initiated coverage of the stock with a Buy rating and a price target of $39 (86.9% upside potential).

Glick commented, “Even if steel prices decline in the second half of 2021, the “cash flow windfall” will enable integrated steel companies to “de-lever, fund pensions, reposition the businesses for a low-CO2 world and generate returns through the cycle.”

The analyst further said that Cleveland-Cliffs is “fully integrated, with iron ore mining and pelletizing assets, a newly commissioned HBI plant in Toledo, steelmaking facilities including both BF/BOF and EAF facilities and advanced finishing capabilities.”

TipRanks Metrics

TipRanks data shows that financial blogger opinions are 90% bullish on CLF, compared to a sector average of 70%.

Cleveland-Cliffs scores a “Perfect 10” from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

What does the Raised Guidance Say?

On June 15, Cleveland-Cliffs raised its adjusted EBITDA guidance for the second quarter as well as for the full-year 2021 based on its recent 2021 financial forecast.

For Q2, the company raised its adjusted EBITDA to $1.3 billion.

For 2021, the company expects EBITDA to be $5 billion versus the previous projections of $4 billion. The company assumes that the U.S. hot-rolled coil price averages will be $1,175 per net ton for the rest of the year.

Following the guidance update, B.Riley analyst Matthew Key reiterated a Buy rating on the stock and increased the price target to $35.00 from $33.00. This implies 67.7% upside potential to current levels.

The encouraging guidance definitely raises optimism about a strong second quarter for Cleveland-Cliffs.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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