![Cliffs headquarters in West Chester, Ohio, USA.](http://static.seekingalpha.com/cdn/s3/uploads/getty_images/1401237056/image_1401237056.jpg?io=getty-c-w750)
JHVEPhoto
As a substitute Of An Funding Thesis
I have been masking Cleveland-Cliffs Inc. (NYSE:CLF) inventory since June 2021, and all alongside I have been bullish on the inventory for a lot of causes. The final time – in June 2023 – I argued for a severe undervaluation of the corporate in mild of its superior projected progress charges in FY2024-25 and implied multiples which are effectively beneath these of its peer group. Since then, CLF has managed to considerably outperform the broad market, displaying ~27% in return:
![Seeking Alpha, Oakoff's previous article on CLF](http://static.seekingalpha.com/uploads/2023/12/22/53838465-17032295039399567.png)
In search of Alpha, Oakoff’s earlier article on CLF
And based mostly on what I see as we speak, my thesis hasn’t modified: I nonetheless see a better share worth for CLF over the subsequent few years, making it an important long-term ‘Purchase’ as we speak.
My Reasoning
In Q3 FY2023, Cleveland-Cliffs reported revenues of $5.6 billion, with adjusted EBITDA of $614 million and GAAP EPS of $0.52. Regardless of the UAW strike affecting Three automotive purchasers, complete shipments reached 4.1 million web tons, setting a quarterly report for metal shipments to the automotive sector. On the identical time, CLF’s price discount efficiency was sturdy, bettering by $31 per web ton in Q3. So though the YoY dynamics in gross sales had been flat, the margins went up considerably in the course of the interval:
![CLF's 10-Q](http://static.seekingalpha.com/uploads/2023/12/22/53838465-17032320227813575.png)
CLF’s 10-Q
Consequently, CLF beat the bottom-line consensus forecast:
![Seeking Alpha](http://static.seekingalpha.com/uploads/2023/12/22/53838465-17032330946780958.png)
In search of Alpha
The agency’s free money circulate for the quarter amounted to $605 million, primarily used to pay down the ABL, lowering web debt to $3.Four billion and rising complete liquidity to $4.Four billion. So CLF’s debt-to-equity decreased additional in Q3, and the debt-to-EBITDA obtained beneath 2x:
![Chart](http://static.seekingalpha.com/uploads/2023/12/22/saupload_ed36ecea31562bec884e90ef5ab949d8.png)
The corporate’s capital construction is now primarily comprised of low-cost fastened coupon debt devices, with no upcoming maturities till 2026. Since buying ArcelorMittal USA in December 2020, CLF has lowered web debt by practically $2 billion and eradicated $3.5 billion in pension and OPEB liabilities.
Apart from the debt discount, CLF purchased again 3.9 million shares, returning ~$60 million to shareholders. That is ~0.56% of as we speak’s market capitalization, however I imagine it is a non permanent quantity as the corporate turns into extra versatile on share buybacks because it reduces its debt load.
Throughout Q3 FY2023 Cleveland-Cliffs was capable of preserve sturdy common promoting costs above $1,200 per web ton. Now price discount is anticipated to proceed, in accordance with the administration’s feedback in the course of the newest earnings name, with an extra $15 per web ton discount forecasted for This autumn.
CLF additionally highlighted its place within the automotive market, emphasizing excellence in assembly buyer wants. They count on complete shipments in This autumn to stay at ~Four million web tons, even when the UAW strike persists. The influence of the strike on CLF appears to be much less important than earlier challenges such because the microchip scarcity and different provide chain points.
The corporate’s dedication to purchasing a good portion of the output from a clear hydrogen hub in northwest Indiana helped safe the placement in October 2023.
As for the failed buy of United States Metal (X), which is ultimately going to be bought to the Japanese firm Nippon Metal (OTCPK:NPSCY), CLF shareholders have really benefited from that end result: The corporate is not going to need to tackle extra debt, which might additional diminish the prospects of accelerating shareholder returns indefinitely. Name me short-sighted, however as a shareholder of the corporate, I would like it to eliminate the debt as quickly as doable, whereas it’s doable because of the nonetheless sturdy financial system. The merger with X might have come on the improper time, destroying worth for shareholders and making CLF extra weak in a doable turbulent financial interval (that will be a consequence of the excessive stakes anyway; it is a matter of timing, for my part).
Now the corporate can proceed to lift metal costs with none extra burden, because it did once more just lately, thus sustaining margins and benefiting from the nonetheless low automotive inventories within the US, which must be replenished in any case.
![TradingEconomics, Domestic Car Inventories](http://static.seekingalpha.com/uploads/2023/12/22/53838465-17032687295661087.png)
TradingEconomics, Home Automotive Inventories
CLF, which has one of many dominant roles within the metal {industry} with a give attention to automakers, continues to be nearly as low-cost as once I checked out it in June 2023. Sure, the P/E ratio for FY2025 seems larger than earlier than, however the EPS progress forecasts for that 12 months predict stagnation.
![Seeking Alpha, author's notes](http://static.seekingalpha.com/uploads/2023/12/22/53838465-17032688058270059.png)
In search of Alpha, creator’s notes
I can not agree with that consensus, because the agency’s debt ought to proceed to fall and buybacks ought to enhance by then – each of which have a constructive influence on EPS on a YoY foundation.
Dangers To Take into account
I would like everybody studying this text to understand that investing in CLF shares carries a number of dangers that must be rigorously weighed. First, market threat is ever-present, as the worth of the inventory is dependent upon normal market situations and geopolitical occasions. As CLF is linked to the metal and iron ore {industry}, buyers are uncovered to industry-specific challenges equivalent to demand fluctuations, iron ore worth volatility, and aggressive pressures. Monetary stability and administration effectiveness additionally contribute to the danger profile, with components equivalent to debt and operational challenges doubtlessly impacting share efficiency. Commodity worth threat is a key issue as CLF is lively in mining and metal manufacturing. Fluctuations in international commodity costs can subsequently have a big influence on the corporate’s revenues and profitability, which represents an extra uncertainty for the funding. Regulatory and political dangers, each at nationwide and worldwide ranges, can also have a unfavorable influence on CLF’s enterprise actions.
Your Takeaway
Regardless of all of the dangers, CLF inventory continues to be one in every of my favourite corporations within the {industry}. The corporate is recovering in seemingly robust instances and with quite a lot of headwinds. So simply take into consideration what potential the corporate might need in calm instances.
I additionally assume the share worth continues to be low-cost. It is nonetheless a ‘discount’ as buyers say, and do not be postpone by some excessive TTM multiples because the FWD multiples present a really completely different image. From all this, I conclude that it nonetheless is sensible to carry CLF in a long-term portfolio and to proceed shopping for on the present worth degree, regardless that it is up +24.5 % year-to-date.
Good luck together with your investments!
Editor’s Notice: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please concentrate on the dangers related to these shares.