On Monday, Wolfe Research maintained its Underperform rating on shares of Cleveland-Cliffs (NYSE:CLF), with a steady price target of $12.00 following the company's announcement of its $2.5 billion acquisition of Stelco.
The transaction, expected to close in the fourth quarter of 2024, involves a purchase price of C$70 per share for Stelco, an 87% premium over its July 12 closing price. Payment will be split between C$60 per share in cash and C$10 per share in equity, with an exchange ratio of 0.454.
Cleveland-Cliffs has arranged financing for the $2.4 billion cash portion through unsecured notes, a term loan, and its asset-based lending facility. The company plans to rapidly reduce the incurred higher-cost debt. The acquisition, according to Cleveland-Cliffs, is strategically sensible from an operational perspective but adds operating leverage in a challenging market for sheet steel.
While the firm expects the deal to generate $120 million in cost synergies, which are considered achievable, it also notes that Stelco's earnings have been highly volatile due to its significant exposure to fluctuating steel prices and its relatively fixed-cost structure. Despite the volatility, less discounting under Cleveland-Cliffs' management could lead to improved performance for Stelco.
Wolfe Research's cautious stance is influenced by a bearish outlook on hot rolled coil (HRC) prices and concerns over softening demand and excess supply, which are part of its "Sheet Storm thesis."
The $12 price target is based on an 8/9x blended 2024/2025E EV/EBITDA multiple, which is above the three-year average of 5.2x but aligns with recent trading levels of U.S. peers. The firm remains skeptical about the near-term pricing benefits of industry consolidation and maintains its Underperform rating on Cleveland-Cliffs.
In other recent news, Cleveland-Cliffs has made a strategic move by acquiring Canadian steelmaker Stelco Holdings Inc. for $2.8 billion. This acquisition is a part of the ongoing consolidation among North American steel producers and is anticipated to contribute to Cleveland-Cliffs' per-share profit for 2024 and 2025.
The deal is expected to close in the fourth quarter of the year, subject to regulatory approval. Analysts at Jefferies maintain a Buy rating on Cleveland-Cliffs stock following the Stelco deal, while JPMorgan downgraded the company from Overweight to Neutral.
In other developments, Janet L. Miller has resigned from Cleveland-Cliffs' Board of Directors due to personal reasons, with no internal conflicts reported. Congressman Mike Kelly has made a significant purchase of Cleveland-Cliffs shares, valued between $50,001 and $100,000.
Despite these changes, Cleveland-Cliffs continues to focus on its core business in the energy and transportation sectors. These are the recent developments in the company's ongoing financial activities and strategic positioning in the steel industry.
InvestingPro Insights
In light of Cleveland-Cliffs' recent acquisition move, real-time data from InvestingPro offers insights that may be of interest to investors monitoring the company's performance. With a market capitalization of $7.73 billion and a forward P/E ratio of 13.37, the company appears to be trading at a lower earnings multiple than the industry average.
Despite a slight decline in revenue growth over the last twelve months as of Q1 2023, Cleveland-Cliffs has maintained a gross profit margin of 7.2%. This figure, while not the strongest, indicates the company's ability to retain earnings relative to sales.
InvestingPro Tips highlight that management's aggressive share buybacks and high shareholder yield could be seen as positive signals of confidence in the company's future. Moreover, the valuation implies a strong free cash flow yield, which may appeal to value-oriented investors. It is worth noting that while analysts have revised their earnings downwards for the upcoming period, the company remains profitable over the last twelve months and analysts predict profitability for this year.
For those looking to delve deeper into the financial health and future prospects of Cleveland-Cliffs, additional insights are available on InvestingPro. There are 10 more InvestingPro Tips that could provide valuable guidance. To access these tips and more detailed analytics, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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