On Thursday, GLJ Research lowered its rating on shares of Cleveland-Cliffs (NYSE:CLF), changing it from Buy to Sell, and set a price target of $10.13. The firm based its decision on a combination of factors, including expectations of lower steel prices and a potential downturn in the U.S. economy.
According to GLJ Research, the average selling price (ASP) for Cleveland-Cliffs' steel may decline in the second quarter of 2024, which could necessitate revisions to consensus estimates.
The calculation of Cleveland-Cliffs' current quarter ASP takes into account a mix of historical and current U.S. Hot-Rolled Coil (HRC) spot prices. With the latest data from Kallanish LTD Commodity showing a drop in U.S. HRC prices to $745 per ton on June 7, 2024, from $775 per ton on May 31, 2024, there are indications that prices could fall further. Commentary from CRU this week suggests that large steel deals in the U.S. are being made in the $600s per ton range.
Applying the aforementioned pricing formula and assuming a continued decline in HRC prices, GLJ Research forecasts a 2Q24E aggregated steel price for Cleveland-Cliffs of $1,103.25 per ton. This figure is approximately $40 per ton lower than the company's guidance provided on April 22, 2024, of $1,135 per ton and below the current Street estimate of $1,137.6 per ton.
The revised stock price leads to an adjusted EBITDA/EPS estimate for 2Q24E of $261 million/-$0.10, which is significantly lower than the consensus estimates of $422 million/$0.18.
The downgrade also factors in market behavior, with service centers reportedly trading steel among themselves rather than restocking from mills, and large deals occurring at lower price points. These elements, combined with the historical trend of declining U.S. HRC spot steel prices from June to August, point to a bearish outlook for the U.S. steel sector in the near term.
In other recent news, Cleveland-Cliffs Inc. reported a strong rebound in profitability during its First Quarter 2024 Earnings Conference Call, with an adjusted EBITDA of $414 million. The company also announced significant share repurchase programs, having bought back over 30 million shares and introducing a new $1.5 billion share repurchase program.
In the analysts' sphere, Cleveland-Cliffs was downgraded to Underperform by Wolfe Research and to Neutral by Citi Research, while Jefferies initiated coverage with a Buy rating, citing the company's potential to benefit from strong demand and potential pent-up demand.
In the midst of these developments, Cleveland-Cliffs has been involved in a dispute with the U.S. Steel Board over a potential sale of U.S. Steel to a foreign entity, emphasizing the need for U.S. Steel to remain American-owned with Union support. Cleveland-Cliffs' CEO, Lourenco Goncalves, criticized the U.S. Steel Board for blaming his company for the fallout of an "un-closeable deal" with a foreign buyer.
These recent events underscore the dynamic and complex landscape in which Cleveland-Cliffs operates. As the company navigates through these developments, it continues to focus on enhancing shareholder value and positioning itself for long-term sustainability in the steel industry.
InvestingPro Insights
In light of GLJ Research's downgrade of Cleveland-Cliffs (NYSE:CLF) and their concerns about the steel market, it's worth considering additional data and insights.
According to InvestingPro, Cleveland-Cliffs has a market capitalization of $7.7 billion, with a P/E ratio over the last twelve months as of Q1 2024 standing at 13.28, which suggests a more favorable valuation compared to the industry standard. The company's revenue for the same period was $21.9 billion, despite a slight decline in revenue growth of -1.92%.
InvestingPro Tips highlight that management's aggressive share buybacks and a high shareholder yield could indicate confidence in the company's financial health. Moreover, the stock's RSI suggests it is in oversold territory, which might interest contrarian investors.
On the flip side, analysts have revised their earnings downwards for the upcoming period, which aligns with GLJ Research's bearish outlook. Nevertheless, the valuation implies a strong free cash flow yield, and analysts predict the company will be profitable this year.
For readers looking to delve deeper into Cleveland-Cliffs' prospects, InvestingPro offers additional tips on the company's performance and future outlook. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and gain access to 5 more InvestingPro Tips that could help inform your investment decision.
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