In this piece, I evaluated two steelmaker stocks, United States Steel (NYSE:X) and Cleveland-Cliffs (NYSE:CLF), using TipRanks’ comparison tool to determine which is better. A closer look suggests a neutral view for U.S. Steel and a bullish view for Cleveland-Cliffs.
U.S. Steel is an integrated steel producer with operations primarily in the U.S. and Central Europe. Meanwhile, Cleveland-Cliffs, formerly known as Cliffs Natural Resources, not only makes steel but also specializes in mining, treating, and pelletizing iron ore.
Shares of U.S. Steel are up 69% over the last year after rallying 44% over the last three months, while Cleveland-Cliffs stock is off 11% over the last year following its three-month rally of 21%.
With such a dramatic difference in their stock-price performances, it’s no surprise that U.S. Steel and Cleveland-Cliff’s valuations are quite different. However, the planned sale of U.S. Steel to a Japanese steelmaker has attached a firm ceiling on its value at $55 per share for now (more on that below).
U.S. Steel (NYSE:X)
In December, U.S. Steel announced plans to be acquired by Japan’s Nippon Steel for $55 per share in an all-cash transaction. Thus, any purchase of U.S. Steel shares is a merger-arbitrage play that revolves around whether or not that acquisition will go through. At the current price of just under $48 a share, a neutral view seems appropriate for U.S. Steel now — pending further merger-related news and the possibility of a significant pullback in the share price.
On the one hand, there is some money to be made at current prices if Nippon Steel’s acquisition goes through, given that the $55-per-share price represents a 40% premium to the pre-announcement price. However, on the other hand, it seems more likely that the growing political uproar will block the deal, which would probably send U.S. Steel shares plummeting.
Last month, President Joe Biden called for a probe into the sale on national security grounds even though Japan is a “close ally” of the U.S. The United Steelworkers union also described the deal as “shortsighted,” so some see Biden’s call for an investigation as a political play as he seeks to position himself as one of the most pro-union presidents in history.
However, Biden’s not the only U.S. politician with concerns about the proposed acquisition of U.S. Steel. Lawmakers on both sides of the aisle are also expressing concerns about national security in connection with the deal.
They also flagged other potential issues like a potential shift in steel-working jobs to low-wage states and warned that it could undermine industrial capacity in the U.S. Republican senators also sent a letter to Treasury Secretary Janet Yellen last month suggesting that the Committee on Foreign Investment in the United States should block the sale.
Meanwhile, ignoring the possible merger suggests U.S. Steel could be poised for a pullback due to its relative strength index of around 70, which places it in overbought territory. In fact, if U.S. Steel shares drop significantly from current levels, they could present a buy-the-dip opportunity, given the stock’s long-term gains.
U.S. Steel shares are up 106% over the last three years and 141% over the last five. Even the 10-year return of 80% suggests some level of downside protection.
What is the Price Target for X Stock?
U.S. Steel has a Hold consensus rating based on zero Buys, three Holds, and one Sell rating assigned over the last three months. At $33.50, the average U.S. Steel stock price target implies downside potential of 29.6%.
Cleveland-Cliffs (NYSE:CLF)
At a P/E of 27.3, Cleveland-Cliffs is trading at a meaningful premium to the basic material industry’s current P/E of 21 but only slightly above the three-year industry average P/E of 26.6. However, management is calling for a re-rating of the company’s multiples higher, and Cleveland-Cliffs continues to display significant pricing power. Thus, a bullish view seems appropriate, at least for now.
Following its own unsuccessful attempt to buy U.S. Steel, Cleveland-Cliffs announced that it would use the cash it had set aside for that purchase to buy back its shares aggressively. During the third quarter, Cleveland-Cliffs repurchased 3.9 million common shares at an average price of $15.09 each, so we would expect the pace of those buybacks to pick up. Investors typically like share buybacks, which often precede increases in stock prices.
Finally, a review of the press releases on Cleveland-Cliffs’ website reveals several price increases on its products, signaling strong demand and sales trends. Together, these factors suggest more upside could be right around the corner.
What is the Price Target for CLF Stock?
Cleveland-Cliffs has a Hold consensus rating based on one Buy, one Hold, and one Sell rating assigned over the last three months. At $17.48, the average Cleveland-Cliffs stock price target implies downside potential of 5.7%.
Conclusion: Neutral on X, Bullish on CLF
With U.S. Steel’s valuation tied up with the proposed acquisition, its stock price is unlikely to rise much further from current levels, although there could be some upside if the deal is ultimately approved. However, political pressures threaten to block the acquisition, so this doesn’t seem like a good time to dabble in U.S. Steel stock.
On the other hand, Cleveland-Cliffs’ more aggressive share buyback plan could serve to boost its stock price, especially given the positive sales and demand trends indicated by the large number of price increases in recent months.
