Cleveland Cliffs (NYSE:CLF) second-quarter earnings outperformed revenue but fell short of its EPS estimate by -13.7%. Are CLF stocks a good investment?
Cleveland-Cliffs (NYSE:CLF) today reported earnings for the second quarter ended June 30, 2022. Second-quarter revenue of $6.3 billion beat FactSet analysts’ forecast of $6.12 billion, up 3.5% unexpectedly. While EPS of $1.14 falls short of the consensus estimate of $1.32, it’s a disappointing -13.7% difference.
Shares in steel maker Cleveland-Cliffs Inc (NYSE:CLF) are down more than 21% this year.
Cleveland-Cliffs Inc (NASDAQ: CLF) is the largest flat steel manufacturer in North America. The company supplies iron ore pellets to the North American steel industry. It is engaged in the production of metal and coke, the production of iron, steel, rolled products and finishes, as well as pipe components, stampings and tools.
The company is vertically integrated from raw materials, direct reduction and scrap to primary steel production and subsequent finishing, stamping, tooling and pipes.
Cliffs was founded in 1847 as a mine operator headquartered in Cleveland, Ohio. The company employs approximately 27,000 people in North America.
The company is also the largest supplier of steel to the automotive industry in North America. It serves many other markets with a wide range of flat steel products.
Cleveland-Cliffs has received several prestigious industry awards for its work in 2021 and was ranked 171st on the 2022 Fortune 500 list.
With the acquisition of ArcelorMittal USA and AK Steel (announced 2020) and the completion of the direct reduction plant in Toledo, Cleveland-Cliffs is now a vertically integrated stainless steel business.
It now has the unique advantage of being self-sufficient, from raw material mining to steel products, tubular components, stampings and tooling.
This is in line with CLF’s semi-annual results of $12.3 billion in revenue and $1.4 billion in net income. Diluted earnings per share were $2.64. Compared to the first six months of 2021, the company posted $9.1 billion in revenue and $852 million in net income, or $1.42 per diluted share.
Cleveland-Cliffs reported $2.6 billion in adjusted EBITDA for the first half of 2022, up from $1.9 billion year-on-year.
Our second quarter results demonstrate continued implementation of our strategy. Free cash flow more than doubled quarter-on-quarter, and we were able to achieve our biggest quarterly debt reduction since we began our transformation a few years ago, while delivering a solid return on equity through share buybacks.
We expect this healthy free cash flow to continue as we enter the second half of the year, driven by lower capex requirements, faster release of working capital and heavy use of fixed price sales contracts. In addition, we expect the ASPs for these fixed contracts to rise further sharply after the reset on October 1st.
$23 million, or $0.04 per diluted share, accelerated depreciation associated with the indefinite downtime of the Middletown coking plant.
Cleveland-Cliffs makes money selling all kinds of steel. In particular, hot rolled, cold rolled, coated, stainless / electrical, sheet and other steel products. The end markets it serves include automotive, infrastructure and manufacturing, distributors and processors, and steel producers.
Net sales of steel in the second quarter were 3.6 million tonnes, including 33% coated, 28% hot-rolled, 16% cold-rolled, 7% heavy plate, 5% stainless steel and electrical products, and 11% other products. including plates and rails.
CLF shares trade at a price-to-earnings (P/E) ratio of 2.5 compared to an industry average of 0.8. Its price to book value (P/BV) ratio of 1.4 is higher than the industry average of 0.9. Cleveland-Cliffs shares do not pay dividends to shareholders.
The Net Debt to EBITDA ratio gives us a rough idea of ​​how long it will take for a company to pay off its debt. The net debt/EBITDA ratio of CLF shares decreased from 12.1 in 2020 to 1.1 in 2021. The high ratio in 2020 was driven by acquisitions. Prior to that, it remained at 3.4 for three consecutive years. The normalization of the ratio of net debt to EBITDA reassured shareholders.
In the second quarter, cost of sales of steel (COGS) included $242 million of excess/non-recurring expenses. The most significant part of this relates to the expansion of the downtime at Blast Furnace 5 in Cleveland, which includes additional repairs to the local sewage treatment plant and power plant.
The company also saw cost increases on a quarterly and annual basis as prices for natural gas, electricity, scrap and alloys rose.
Steel is a key component of the global energy transition, which ensures the sustainability of CLF shares going forward. The production of wind and solar energy requires a lot of steel.
In addition, domestic infrastructure needs to be overhauled to make room for the clean energy movement. This is an ideal situation for Cleveland-Cliffs shares, which have a good chance of benefiting from rising demand for domestic steel.
Our leadership in the automotive industry sets us apart from all other steel companies in the United States. The state of the steel market over the past year and a half has been largely driven by the construction industry, while the automotive industry has lagged far behind, largely due to non-steel supply chain issues. However, consumer demand for cars, SUVs and trucks has become huge as demand for cars outpaced production for more than two years.
As our automotive customers continue to address supply chain challenges, pent-up demand for electric vehicles rises, and passenger car manufacturing catches up, Cleveland-Cliffs will be the main beneficiary of every U.S. steel company. Over the remainder of this year and next year, this important difference between our business and other steel producers should become apparent.
Based on the current 2022 futures curve, this means that the average HRC index price will be $850 per net ton before the end of the year, and Cleveland-Cliffs expects the average selling price in 2022 to be around $1,410 per net ton. a significant increase in fixed price contracts, which the company expects to renegotiate on October 1, 2022.
Cleveland-Cliffs is a company that faces cyclical demand. This means that its income can fluctuate, which is why the price of CLF shares is subject to volatility.
Commodities have been on the move as prices soared due to supply chain disruptions exacerbated by the pandemic and war in Ukraine. But now inflation and rising interest rates are raising fears of a global recession, making future demand uncertain.
In recent years, Cleveland-Cliffs has evolved from a diversified raw material company to a local iron ore producer and is now the largest producer of flat products in the US and Canada.
For long-term investors, Cleveland-Cliffs stock may look attractive. It has become a strong organization that can thrive for a longer period of time.
Russia and Ukraine are two of the world’s top five net exporters of steel. However, Cleveland-Cliffs does not rely on either, giving CLF stock an intrinsic advantage over its peers.
However, for all the uncertainty in the world, economic growth forecasts are vague. Confidence in the manufacturing sector tumbled as recession worries continued to put pressure on commodity stocks.
The steel industry is a cyclical business and while there is a strong case for another surge in CLF stock, the future is unknown. Whether or not you should invest in Cleveland-Cliffs stock depends on your risk appetite and investment time horizon.
This article does not provide any financial advice or recommend trading in any securities or products. Investments may depreciate and investors may lose some or all of their investment. Past performance is not an indicator of future performance.
Kirstin McKay has no positions in the stocks and/or financial instruments mentioned in the article above.
Digitonic Ltd, the owner of ValueTheMarkets.com, has no positions in the stocks and/or financial instruments mentioned in the article above.
Digitonic Ltd, the owner of ValueTheMarkets.com, has not received payment from the company or companies mentioned above for the production of this material.
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