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Cleveland-Cliffs (CLF) Down 23% in 3 Months: Time to Buy the Dip?
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Cleveland-Cliffs Inc. (CLF - Free Report) shares have lost 23.1% in the past three months, significantly underperforming the Zacks Mining – Miscellaneous industry’s increase of 2%. The bearishness is partly due to the underlying challenges in the steel industry as reflected by the significant retreat in U.S. steel prices driven by a combination of demand slowdown and oversupply, which have triggered a downward revision in CLF’s earnings estimates.
Technical indicators show that CLF has been trading below the 200-day simple moving average (SMA) since Apr 30, 2024. Following a death crossover on Jun 13, 2024, the 50-day SMA continues to read lower than the 200-day SMA, indicating a bearish trend. The stock also entered the oversold territory twice this year, first on Apr 23 after the release of lackluster first-quarter results followed by the second on Jun 5. A Relative Strength Index (RSI) value below 30 indicates a stock is oversold.
Cleveland-Cliffs Trades Below 200-Day SMA
Image Source: Zacks Investment Research
CLF is currently trading at a roughly 29.6% discount to its 52-week high of $22.97 reached on Apr 4, 2024.
Given the significant pullback in Cleveland-Cliffs’ shares, investors might be tempted to snap up the stock. But is this the right time to buy CLF? Let’s find out.
Slumping Steel Prices Weigh on Prospects
CLF is hamstrung by the significant downward correction in steel prices this year, which has largely contributed to the downward slide in the stock. U.S. steel prices have seen a sharp decline this year due to a slowdown in end-market demand after a strong run in late 2023 that extended into early 2024.
The benchmark hot-rolled coil (HRC) prices have retreated since early 2024, with prices plummeting to below $800 per short ton in March 2024 from $1,200 per short ton at the start of the year. This more than 30% decline was influenced by a concoction of factors, including a pullback in steel mill lead times, an oversupply of steel exacerbated by increased imports, reduced demand from key industries and economic uncertainties.
Sluggish industrial production and construction activities also contributed to the decline. The price slump led to lower profitability for steel producers. U.S. HRC prices continue their downward slide, being pressured by an influx of imports, currently hovering below the $700 per short ton level.
While demand in automotive remains healthy, the construction sector has experienced a slowdown in the United States due to high interest rates, dampening steel demand in this key end market. Elevated borrowing costs and inflation have taken a bite out of the residential construction industry. Manufacturing activities have also weakened amid softening demand for goods and higher borrowing costs.
Lower prices will likely drag down CLF’s revenues and profits. Cleveland-Cliffs expects its average selling prices per net ton of steel products to decline by around $40 on a sequential comparison basis in the second quarter of 2024.
Cleveland-Cliffs is the largest producer of iron ore pellets in North America and the region's biggest flat-rolled steel producer. The acquisition of AK Steel Holding Corporation, completed in March 2020, allowed CLF to become a vertically integrated steel company. Its vertically integrated footprint, starting from mining to the production of high-value finished steel products, provides it with a competitive advantage in supplying automotive and other steel end markets. As a leading supplier of automotive-grade steel in the United States, Cleveland-Cliffs’ automotive steel business remains the fulcrum of its primary competitive strength.
CLF benefits from its competitive strength by leveraging the ability to source its primary steelmaking feedstock, iron ore pellets, as well as scrap and hot-briquetted iron (HBI) domestically and internally at a stable cost vis-à-vis its peers that largely depend on imported pig iron, whose supply has been disrupted amid the Russia-Ukraine conflict.
Cost Cuts to Yield Margin Benefits
Cleveland-Cliffs is executing cost-cutting initiatives, leading to reduced steel-making expenses. In 2023, the company achieved an $80 per ton reduction in costs aided by decreased input costs and increased productivity. It anticipates a $30 per net ton reduction in steel unit costs in 2024, resulting in an expected $500 million benefit in adjusted EBITDA compared to 2023. CLF also sees a $20 per ton sequential decline in unit costs in the second quarter.
Earnings Estimates Southbound
Earnings estimates for CLF have been going down over the past 60 days. The Zacks Consensus Estimate for 2024 has decreased 68.2%. The consensus estimate for second-quarter 2024 has also been revised 100% downward over the same time frame.
The Zacks Consensus Estimate for 2024 earnings is currently pegged at 34 cents, suggesting a year-over-year decline of 68.2%. Moreover, earnings are expected to register a roughly 100% decline in the second quarter.
Image Source: Zacks Investment Research
An Underperformer
CLF’s price performance has been dismal this year, partly reflecting the broader industry challenges triggered by a significant decline in steel prices. Its shares have lost 20.8% year to date, underperforming the industry’s 7.9% decline and the S&P 500’s rise of 18.2%. The stock has also underperformed its major U.S. steel-making peers year to date, with a 9.4% gain for Steel Dynamics, Inc. (STLD - Free Report) and a 7.4% and 19.2% decline for Nucor Corporation (NUE - Free Report) and United States Steel Corporation (X - Free Report) , respectively.
YTD Price Performance
Image Source: Zacks Investment Research
Stretched Valuation
Notwithstanding the downside in its share price, Cleveland-Cliffs is currently trading at a forward 12-month earnings multiple of 16.35X, a roughly 23.2% premium to the peer group average of 13.27X, and considerably higher than its five-year median. The market appears to have priced its shares higher despite the bleak earnings trajectory.
Image Source: Zacks Investment Research
To Sum Up
While Cleveland-Cliffs benefits from its vertically integrated footprint, competitive strength and cost-saving actions, it is exposed to the choppiness in the steel space that has led to its underperformance. A significant pullback in steel prices coupled with declining earnings estimates cast a pall on the company's prospects. Its stretched valuation also might not offer an attractive entry point at this time. It is not advisable to buy the dip in this Zacks Rank #4 (Sell) stock until the company demonstrates substantial improvement in its financial performance and market conditions stabilize.
Image: Bigstock
Cleveland-Cliffs (CLF) Down 23% in 3 Months: Time to Buy the Dip?
Cleveland-Cliffs Inc. (CLF - Free Report) shares have lost 23.1% in the past three months, significantly underperforming the Zacks Mining – Miscellaneous industry’s increase of 2%. The bearishness is partly due to the underlying challenges in the steel industry as reflected by the significant retreat in U.S. steel prices driven by a combination of demand slowdown and oversupply, which have triggered a downward revision in CLF’s earnings estimates.
Technical indicators show that CLF has been trading below the 200-day simple moving average (SMA) since Apr 30, 2024. Following a death crossover on Jun 13, 2024, the 50-day SMA continues to read lower than the 200-day SMA, indicating a bearish trend. The stock also entered the oversold territory twice this year, first on Apr 23 after the release of lackluster first-quarter results followed by the second on Jun 5. A Relative Strength Index (RSI) value below 30 indicates a stock is oversold.
Cleveland-Cliffs Trades Below 200-Day SMA
CLF is currently trading at a roughly 29.6% discount to its 52-week high of $22.97 reached on Apr 4, 2024.
Given the significant pullback in Cleveland-Cliffs’ shares, investors might be tempted to snap up the stock. But is this the right time to buy CLF? Let’s find out.
Slumping Steel Prices Weigh on Prospects
CLF is hamstrung by the significant downward correction in steel prices this year, which has largely contributed to the downward slide in the stock. U.S. steel prices have seen a sharp decline this year due to a slowdown in end-market demand after a strong run in late 2023 that extended into early 2024.
The benchmark hot-rolled coil (HRC) prices have retreated since early 2024, with prices plummeting to below $800 per short ton in March 2024 from $1,200 per short ton at the start of the year. This more than 30% decline was influenced by a concoction of factors, including a pullback in steel mill lead times, an oversupply of steel exacerbated by increased imports, reduced demand from key industries and economic uncertainties.
Sluggish industrial production and construction activities also contributed to the decline. The price slump led to lower profitability for steel producers. U.S. HRC prices continue their downward slide, being pressured by an influx of imports, currently hovering below the $700 per short ton level.
While demand in automotive remains healthy, the construction sector has experienced a slowdown in the United States due to high interest rates, dampening steel demand in this key end market. Elevated borrowing costs and inflation have taken a bite out of the residential construction industry. Manufacturing activities have also weakened amid softening demand for goods and higher borrowing costs.
Lower prices will likely drag down CLF’s revenues and profits. Cleveland-Cliffs expects its average selling prices per net ton of steel products to decline by around $40 on a sequential comparison basis in the second quarter of 2024.
Vertically Integrated Profile & Competitive Advantage Remain Core Strengths
Cleveland-Cliffs is the largest producer of iron ore pellets in North America and the region's biggest flat-rolled steel producer. The acquisition of AK Steel Holding Corporation, completed in March 2020, allowed CLF to become a vertically integrated steel company. Its vertically integrated footprint, starting from mining to the production of high-value finished steel products, provides it with a competitive advantage in supplying automotive and other steel end markets. As a leading supplier of automotive-grade steel in the United States, Cleveland-Cliffs’ automotive steel business remains the fulcrum of its primary competitive strength.
CLF benefits from its competitive strength by leveraging the ability to source its primary steelmaking feedstock, iron ore pellets, as well as scrap and hot-briquetted iron (HBI) domestically and internally at a stable cost vis-à-vis its peers that largely depend on imported pig iron, whose supply has been disrupted amid the Russia-Ukraine conflict.
Cost Cuts to Yield Margin Benefits
Cleveland-Cliffs is executing cost-cutting initiatives, leading to reduced steel-making expenses. In 2023, the company achieved an $80 per ton reduction in costs aided by decreased input costs and increased productivity. It anticipates a $30 per net ton reduction in steel unit costs in 2024, resulting in an expected $500 million benefit in adjusted EBITDA compared to 2023. CLF also sees a $20 per ton sequential decline in unit costs in the second quarter.
Earnings Estimates Southbound
Earnings estimates for CLF have been going down over the past 60 days. The Zacks Consensus Estimate for 2024 has decreased 68.2%. The consensus estimate for second-quarter 2024 has also been revised 100% downward over the same time frame.
The Zacks Consensus Estimate for 2024 earnings is currently pegged at 34 cents, suggesting a year-over-year decline of 68.2%. Moreover, earnings are expected to register a roughly 100% decline in the second quarter.
An Underperformer
CLF’s price performance has been dismal this year, partly reflecting the broader industry challenges triggered by a significant decline in steel prices. Its shares have lost 20.8% year to date, underperforming the industry’s 7.9% decline and the S&P 500’s rise of 18.2%. The stock has also underperformed its major U.S. steel-making peers year to date, with a 9.4% gain for Steel Dynamics, Inc. (STLD - Free Report) and a 7.4% and 19.2% decline for Nucor Corporation (NUE - Free Report) and United States Steel Corporation (X - Free Report) , respectively.
YTD Price Performance
Stretched Valuation
Notwithstanding the downside in its share price, Cleveland-Cliffs is currently trading at a forward 12-month earnings multiple of 16.35X, a roughly 23.2% premium to the peer group average of 13.27X, and considerably higher than its five-year median. The market appears to have priced its shares higher despite the bleak earnings trajectory.
To Sum Up
While Cleveland-Cliffs benefits from its vertically integrated footprint, competitive strength and cost-saving actions, it is exposed to the choppiness in the steel space that has led to its underperformance. A significant pullback in steel prices coupled with declining earnings estimates cast a pall on the company's prospects. Its stretched valuation also might not offer an attractive entry point at this time. It is not advisable to buy the dip in this Zacks Rank #4 (Sell) stock until the company demonstrates substantial improvement in its financial performance and market conditions stabilize.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.