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Time To Book Profits on This NYSE-Listed Materials Stock – CLF

Mar 11, 2022 | Team Kalkine
Time To Book Profits on This NYSE-Listed Materials Stock – CLF


Cleveland-Cliffs Inc.

Cleveland-Cliffs Inc. (NYSE: CLF) is a flat-rolled steel and iron ore pellets manufacturer in North America. It is vertically integrated from mined raw materials and direct reduced iron to primary steelmaking and downstream finishing, stamping, tooling, and tubing. Because of its complete offering of flat-rolled steel products and steel supply to the automobile sector in North America, the company serves a wide range of markets.

Why should Investors Book Profits?

  • Leveraged Balance Sheet: The company's debt/equity ratio was 0.97x as of December 31, 2021, compared to the industry median of 0.23x. In addition, its long-term debt-to-total-capital ratio was 47.2%, compared to 13.9% for the same period in the industry. The company's exposure to balance-sheet risk has increased due to this.
  • Long Cash Cycle: At the end of December 31, 2021, the company's cash conversion days were 91.7 days, compared to the industry median of 62.7 days, implying that the company takes a long time to convert its inventory to cash.
  • Below Industry Margins: In FY21, the company's gross and EBITDA margins were 22.2% and 25.3%, respectively, compared to the industry median of 49.6% and 41.0%.
  • Supply Concentration Risk: For electric power and natural gas, many of the company's activities and mines rely on a single supplier. A significant disruption in service or tariff changes from its energy providers could substantially impact its production costs and profit margins.
  • Technical Weakness: CLF's prices moved up by ~40.10% from the last recommended entry price and made a high of USD 27.79 on March 07, 2022. Prices reached a crucial resistance level of USD 27.79 but were unable to break this level, indicating the possibility of a downside correction which may lead the prices towards the resistance turned support level of USD 21.80.
  • On the weekly chart, RSI (14-period) shows that stock is approaching the overbought zone at 69.52 levels, supporting a downside correction. However, prices are still sustaining above the trend-following indicators 21-period SMA and 50-period SMA and may act as the support levels for the stock.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

CLF's stock price has surged 29.20% in the past month and is currently trading close to the higher-band of its 52-week range of USD 14.01 to USD 27.79. We have valued the stock using the Price/Cash Flow-based relative valuation methodology and arrived at a target price of USD 22.20.

Considering the surge in the stock price in a brief period, below industry margins, leveraged balance sheet, current valuation, and unfavourable technical indicators, we recommend a "Sell" rating on the stock at the current price of USD 26.745, up 1.10% as of March 11, 2022, at 12:23 PM ET.

Three-Year Technical Price Chart (as of March 11, 2022, at 12:23 PM ET). Source: REFINITIV, Analysis by Kalkine Group

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

* All forecasted figures and industry information have been taken from REFINITIV.