While the broader markets have recouped their recent losses and the S&P 500 Index ($SPX) is approaching its all-time highs, some sectors have underperformed badly in 2024, including the metals and mining sector.
Commodity prices have been weak this year amid concerns over the Chinese economy, which consumes nearly half of all major metals. China’s slowdown - especially when it hits the country’s real estate sector, which is the single biggest consumer of everything from steel (HVU24) to copper (HGU24) and aluminum (ALX24) - is bound to send shockwaves through the commodity sector.
Looking at U.S.-based steel companies, Nucor (NUE) and Cleveland-Cliffs (CLF) are in the red this year, and are not far from their 52-week lows. U.S. Steel Corporation (X) has also lost nearly a quarter of its market cap amid dwindling hopes of being acquired by Japan’s Nippon Steel, which was willing to pay a massive premium for the once-iconic company.
With a YTD loss of over 35% based on Friday’s closing prices, CLF stock has underperformed its peers. Is CLF a good steel stock to buy now after the underperformance? We’ll discuss in this article, beginning with a look at the price action in steel companies this year.
Why Have Steel Stocks Fallen in 2024?
Steel companies’ price action in 2024 isn't too hard to understand after looking at the downtrend in steel prices, pictured below.
The fortunes of metal and mining companies tend to be interwoven with the commodities they produce. U.S. steel prices have been weak amid a confluence of factors - including tepid domestic demand led by the slowdown in construction activity, weak global steel and iron ore prices, and finally, higher imports.
Why Has CLF Stock Underperformed?
CLF has higher operating and financial leverage than its peers, which means that the stock underperforms in periods of slowdown, and vice versa. The company has been on an acquisition spree, and has transformed itself into an integrated steel company from an iron ore mining company.
Namely, it acquired AK Steel, the U.S. assets of global steel giant ArcelorMittal (MT), and more recently, Canada-based Stelco - all of which have led to an increase in its debt. CLF's net debt was $3.4 billion at the end of June, while its market cap is just around $6.2 billion. Cleveland-Cliffs was also looking to acquire U.S. Steel Corporation, but did not match Nippon’s lofty offer.
Should You Buy Cleveland-Cliffs Stock?
Cleveland-Cliffs is the leader in the automotive steel market, which makes it a somewhat unique proposition. Automotive companies typically buy steel on a contract basis, which shields CLF from day-to-day volatility in steel prices.
As CLF’s CFO Celso Goncalves said during the Q2 earnings call, “the reliable and consistent margins we achieved in automotive from fixed prices allow us to continue to generate free cash flow in any spot market downcycle, particularly in a strong market for automotive.”
Cleveland-Cliffs is also the only producer of grain-oriented electrical steel (GOES) in the U.S. The product is used in electric transformers, where demand is expected to be strong, led by the electric vehicle (EV) transition and higher electricity demand due to the artificial intelligence (AI) pivot.
Electrical steel is a key profitability driver for CLF, and during Q2, the product accounted for 15% of its earnings before interest, tax, depreciation, and amortization (EBITDA), while its share in shipments was a mere 2%.
CLF is also working on various value-enhancing projects and is cutting costs structurally. It has also been using the free cash flows to retire some of its debt, while also repurchasing shares to bring down its outstanding share count.
CLF Stock Forecast
Wall Street analysts aren't too bullish on CLF stock, though, and of the 11 analysts in coverage, only 2 rate it as a “Strong Buy.” Six analysts rate it as a “Hold,” while the remaining 3 say it's a “Strong Sell.”
CLF even trades below its Street-low target price, while the mean target price of $17.58 is over 32% higher than Friday’s closing prices.
Why Does CLF Stock Look Like a Buy for Aggressive Investors?
The macro environment looks favorable for CLF after Fed Chair Jerome Powell set the table for a September rate cut, with the market now only debating whether it will be a 25-basis point or a 50-basis point cut.
A Fed rate cut would bode well for rate-sensitive industries like real estate and automotive, and by extension, for steel companies. Plus, U.S. steel prices might have bottomed out and should see a slight recovery – even if not a mega rebound.
From a valuation perspective, CLF could appear stretched at a next 12-month enterprise value (EV)-to-EBITDA multiple of 7.5x, but the valuations of commodity companies tend to peak near cyclical bottoms (as currently) as their earnings are subdued due to low prices.
A wild card for U.S. steel companies, especially CLF, is the possible return of Donald Trump to the White House. Trump has vowed tough actions against imports, and in his first tenure, he slapped a 25% tariff on U.S. steel imports - which have since been diluted to a great extent, with that process starting during his own administration.
All of that said, I find CLF stock to be a good buy at these prices, especially for investors with a high risk appetite. The stock is among the best names to play a cyclical rebound in commodity prices amid the expected global monetary policy easing.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
