Forget lithium-ion batteries, vaccines and cloud applications. Forget SPACs. Forget Bitcoin. The new speculative game is rolled steel. It’s time to meet Cleveland-Cliffs (NYSE:CLF) stock.
Here’s your CLF stock pitch. If American industry is coming back, it’s going to need a lot of rolled steel. Infrastructure uses a lot of steel, and so do cars. The steel industry has been turning down for decades, but Joe Biden says it’s coming back, baby.
Cleveland-Cliffs is the largest producer of flat-rolled steel in North America. It also mines and pelletizes iron ore. It says it wants to be a “sustainable” steel company.
Over the last year Cleveland-Cliffs stock is up a staggering 335%. That’s almost double what DraftKings (NASDAQ:DKNG) has done, almost three times better than Zoom Video (NASDAQ:ZM), four times more than Apple (NASDAQ:AAPL).
Undervalued CLF Stock Impresses Cramer
CNBC analyst Jim Cramer believes CLF stock is still undervalued, “a really, really heavy cyclical.” It has a low cost structure. It brings in iron through the Great Lakes and uses it in mills formerly owned by AK Steel and ArcelorMittal.
Forget Elon Musk. Meet Lourenco Goncalves, CLF CEO since 2014. Cramer recently chatted up Goncalves and came away impressed.
But cross him at your peril. S&P Global (NYSE:SPGI) has a lower rating on his debt than Moody’s? “S&P is just horrible,” he says. Goldman Sachs (NYSE:GS) said you’d miss earnings estimates? “You can run but you can’t hide.” Feisty, that one.
Steel companies make heavy use of debt. CLF is no exception. Goncalves doubled his debt load in 2020, to over $5.7 billion, after buying AK Steel for $1.1 billion in stock, and the U.S. operations of AcelorMittal for $1.4 billion in cash and stock.
Don’t Expect a Dividend
CLF beat analyst estimates for first quarter earnings by 2 cents, although it missed on revenue. The new company had revenue of over $4 billion during the quarter, and $410 million in Earnings Before Income Taxes, Depreciation and Amortization (EBITDA).
If it can keep up that performance for the full year, you’re talking about EBITDA of $1.6 billion and sales of $16 billion supporting a market cap of $9 billion. The debt puts the enterprise value at $14.7 billion. But Goncalves thinks he can do even better, guiding to adjusted EBITDA of $4 billion for the year.
Cleveland-Cliffs stock analysts have an average revenue estimate for 2021 of $18.36 billion, with $3.42/share of earnings. That’s a forward price to earnings multiple of 5.3. Small wonder that the average one-year price estimate tracked by TipRanks is 44% higher than the current price.
Just don’t expect a dividend. Goncalves says he’s going to put all his cash flow to work reducing long-term debt. CLF’s latest notes were priced at 6.375% and were rated B/RR4 by Fitch. Moody’s gives CLF debt a B1 rating, but with a positive outlook.
You can see why Goncalves might want to massage those expectations. Cutting the debt is a very profitable use of cash, given its cost.
The Bottom Line
The post-pandemic boom is perfectly timed for Cleveland-Cliffs.
If it can meet expectations, it can pay off much of that debt and be in great position to take advantage of the American Jobs Act. With the Biden Administration pounding the table for companies to “buy American,” CLF might indeed be a very cheap stock.
The big risk here is the semiconductor shortage. If car makers are short on chips, they can’t ramp up car production, thus they won’t be buying CLF rolled sheet. But if you believe in an American industrial comeback, and this company was founded in 1847, CLF stock looks like a good place to be.
At the time of publication, Dana Blankenhorn directly owned shares in AAPL.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.
