Cleveland-Cliffs (CLF) is a leading producer of steel in North America, providing flat-rolled carbon, stainless, and electrical steel products primarily for the automotive, infrastructure, and manufacturing markets. Our Strong Buy opinion reflects our view that CLF has a competitive advantage in the domestic steel market, comments analyst Matthew Miller in CFRA Research’s flagship newsletter, The Outlook.
Cleveland Cliffs is vertically integrated, from mining through iron making, steelmaking, rolling, finishing, and downstream, with hot and cold stamping of steel parts and components. CLF is the largest supplier of steel to the automotive industry in North America.
With the acquisitions of AK Steel and ArcelorMittal USA, CLF has become fully integrated, which should help smooth out the seasonality that the company has traditionally experienced. CLF has high exposure to harder-to-make steels and very little exposure to commodity steel products, such as hot-rolled coil. The company is also over-indexed to the automotive sector, supplying virtually all auto manufacturers in the U.S.
CLF is self-sufficient with its production of raw materials for its steel manufacturing, including iron ore pellets, hot briquetted iron feedstock, and coking coal. We think CLF is poised to outperform peers with its best-in-class automotive business. We expect automotive build-rates will accelerate in 2023, given pent-up demand for automobiles following a long period of microchip supply shortages hurting build rates for automotive manufacturers.
Those microchip supply shortages appear to be improving. Our 12-month target price of $23 values CLF at an EV/EBITDA of 5.5x our 2023 EBITDA estimate, a discount to peers, which are trading at an average forward EV/EBITDA of 6.4x. We think investors are underestimating CLF's resilient free cash flow profile (especially given the company's annual fixed-price contracts) and its differentiated product offering, with higher-margin products serving automotive end markets.
We see a compelling risk/reward profile, as the management team is focused on maximizing return on invested capital and we expect CLF to post best-in-class profit margins, which should provide a positive catalyst in the form of multiple expansion.
Risks to our recommendation and target price include an economic slowdown in North American steel-consuming markets (especially automotive or nonresidential construction), lower steel prices, higher input costs, and the risk that the Biden administration could eliminate (or relax) the Section 232 tariffs on steel imports, which have been supporting the domestic steel industry since 2018.
Recommended Action: Buy CLF.
