Cleveland-Cliffs Inc

Founded in 1847, Cleveland-Cliffs Inc (NYSE: CLF) produces flat-rolled steel in North America. It is also the largest supplier of the automotive industry in North America.

Investment Highlights – BUY at USD 23.57

• The elimination of preferred shares shall reduce the Company’s diluted share count by 10% on a proforma basis.
• CLF reported a significant jump in revenue from US$1.1 billion in Q2 FY20 to US$5.0 billion in Q2 FY21. Subsequently, it turned into net income in Q2 FY21 from a net loss of US$108 million in Q2 FY20.
• The demand for steel remained excellent while led to the spike in prices with pandemic-spurred trends.
• Over the past four years (FY16 to FY20), revenue and gross profit have surged at a CAGR of 36.23% and 13.34%, respectively.
• From a technical standpoint, CLF’s stock price is trading above the 20-day EMA (USD 22.49), reflecting a bullish price momentum. Adjacently, the MACD line is trading above centerline, while it has given a bullish crossover against the signal line.

Key Risks

• The widespread shortage of the automotive chip, limited rail and truck availability can impact its several clients in different sectors.
• The resurgence in Covid-19 cases can increase the Company’s operating costs and impact its operational abilities.

Recent News

Redemption of Shares: On 28 July 2021, CLF completed the redemption of all outstanding preferred shares with nearly US$1.2 billion in cash.

Q2 FY21 Results for six months ended 30 June 2021 (as on 22 July 2021)

 (Source: Company Website)

• During Q2 FY21, CLF reported revenue and net income of US$5.0 billion and US$795 million, respectively.
• It reflected a growth in both top-line and bottom-line income statement items, due to the efficiency in operating footprints, robust demand for steel, and higher contract prices.
• As of 19 July 2021, CLF reported a total liquidity of US$2.1 billion.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (FY21) (Illustrative)

Conclusion

Following the strong trading performance in Q2 FY21, the outlook for FY21 looks bright. In Q3 FY21, adjusted EBITDA is expected to be nearly US$1.8 billion, while free cash flow generation is anticipated to be around US$1.4 billion. The Company has been capitalizing well on the market opportunities and meeting the elevated demand with production ramp-up and operational efficiency. The high steel prices shall support the growth and generate substantial value for its shareholders. The stock made a 52-week high and low of USD 25.83 and USD 5.20, respectively.

Based on the record revenue growth, substantial net income, financial guidance, reduced share dilution, favourable steel prices, supported by the valuation conducted above, we have given a "BUY" stance on Cleveland-Cliffs Inc at the current market price of USD 23.57 (as of 3 August 2021, at 9:40 AM ET), with lower double-digit upside potential based on 4.56x Price/NTM Cash Flow (approx.) on FY21E Cash Flow Per Share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).