CLF

Cleveland-Cliffs Inc.

15.93
USD
-2.66%
15.93
USD
-2.66%
15.31 34.04
52 weeks
52 weeks

Mkt Cap 8.18B

Shares Out 499.74M

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Cleveland-Cliffs: This Is Absolutely Ridiculous

Summary This is a stock that should be doing well during inflation, as steel costs remain elevated. The macro situation is worsening, and the market is confused on how to value the name. While the market remains confused, we are about to see a record year for cash flow. We can't help but buy this at prescribed trading levels. Looking for more investing ideas like this one? Get them exclusively at BAD BEAT Investing. Learn More » What we like to do as a company is to find stocks that are beaten down unfairly and profit from an inevitable bounce back. Sometimes you have to take a stop loss, much like folding a hand in poker. You give up a small pot by folding the hand to protect against bigger losses, so that you can have the ammunition needed to win a big pot, or in the case of investing, profit from higher share prices. You can in many cases park money long-term and make money. At least in profitable companies. Cleveland-Cliffs (NYSE:CLF) makes money. In our opinion, while it's a cyclical type of investment, steel is still a good place to be. Economic activity remains strong. While there are fears of a hard landing and a recession, given the outlook for the company, this action is absolutely ridiculous. We cannot help but scale into the stock here. It should be guarded somewhat from inflation. Steel prices remain elevated. The stock is trading at silly valuations. We get it, the market is trying to price the stock for future pain, but, right now, we think you can profit on a trade on a rebound in the name. Let us discuss. The play First, take a look at the chart here: Over the last year, the stock has had some reliable trading ranges, with a break out well above $30 and a breakdown below $18 as anomalies. We think that at $21-$22 the stock is setting up for some buying. Here is how we would play it. Target entry 1: $21.30-$21.50 (40% of position) Target entry 2: $19.00-$19.20 (60% of position) Stop loss: $16.90 Target exit: $23 short term; if average down as prescribed your breakeven price is around $20, so you can still profit on this trade if shares rebound from target 2, to $20+. Options consideration: We like selling puts with the VIX elevated. Would go out two months and consider selling the $20 strikes to define entry. For call buying, would go out to at least the end of the year. Consider the January 2023 $22 strike for $4.40, and $3.00 (if shares fall). Discussion In the macro sense, there are a few risks and that is why the stock has plunged. First, the big boogeyman that is recession which could come to steal everyone's profits and cause misery throughout the land. Ok, we are trivializing it, but recession is not guaranteed. It is a bit of a self-fulfilling prophecy in a way. The more we seem to stress it the more we are ushering it in. And markets are psychological, make no mistake. We then have risks in terms of pricing. With inflation and a still-hot economy as a whole, pricing should be pretty good. Chinese lockdowns over COVID had wreaked havoc on pricing, sending prices lower, and higher on restrictions easing. In addition, with China reopening gradually, it should help prices further, especially after they cut a lending rate while others like the U.S. are tightening. The conflict in Ukraine has had a mixed impact. Without going into grave detail the conflict has disrupted pig iron supply badly. Millions of tons of pig iron supply have been impacted. Meanwhile, U.S. production becomes more paramount. There are seven real producers of flat-rolled steel in the U.S. and Cleveland-Cliffs is the only one among the seven that does not rely on imported pig iron. This means less cost increases for Cliffs relative to the competition. The chair of the ISM, Tim Fiore recently stated that "Overall, the U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment". There are also labor shortage problems that are causing issues. Compared to where we were coming into the year the macroeconomic picture is now softer. We have a hawkish Fed and of course ongoing inflationary pressures. While overall steel industry data is still positive, things do not look as good as they did six months ago. But they also do not look bad, so the action in the stock is ridiculous in our estimation. This is especially true when we consider that 2022 is going to be the best year ever for cash flow, and performance remains strong. We are only 5 months into the year. The company reported earnings last month and they were strong. The fact of the matter is perhaps earnings estimates were slightly too high, but shares are still 4X FWD EPS even if we take a more conservative view on earnings. More on that in a moment. The company just forecasted positive expectations a few weeks ago. After they reported, there were a few big positives in the release. management raised its "full-year 2022 average selling price expectation by $220 to $1,445 per net ton". A lot of the increase was a result of "better than expected prices on renewals of fixed-price contracts resetting April 1, 2022". There was also a "better view on expected spreads between hot-rolled and cold-rolled steel". Finally hot rolled steel prices could be over $1,300. With that, the company expects to generate record levels of free cash flow in 2022. That is huge. You can't look at performance and think the company is doing poorly. Q1 2022 consolidated revenues were $6.0 billion, compared to Q1 2021 revenues of $4.0 billion. This was a beat of $570 million vs estimates. The company's adjusted EBITDA of $1.5 billion in Q1 of 2022. This was three times higher than last year. It also brought the last 12 months of EBITDA to $6.2 billion. That is an all-time record for any 12-month period in Cliff's history. Pricing has fluctuated, with prices slightly lower, but spreads on hot and cold rolled steel improving. Overall, the company earned $1.71 per share, well above $1.46 expected for the year. From a valuation perspective, the situation is laughable. The company is trading at a forward price to earnings of 3.6, even lower if you buy shares where we have them pegged. This is based on the consensus of $6.20 in EPS. But what if say the market shifts and these estimates are a full 20% too high. The market has reset the price of the stock as if this would be true. Let's say the company 'only' earns $5.00. Well, at our buy points you are still paying 4X FWD EPS. That is laughable. We are also looking at a price to cash flow of less than 3X. That is absurd. The EV/sales is less than 0.7 and the price to book is 1.3 on a forward basis. The one big risk? Well, there is still a lot of debt, about $5 billion worth and just $35 million of cash on hand. This was addressed on the conference call: Speaking of cash flow and capital allocation, we continue to clean up our capital structure and favorite debt reduction over other uses of capital at this time. This year, we have already redeemed our convertible notes and our 9.875% secured notes, which we completed this week, well ahead of its 2025 maturity. With this proactive approach, our most expensive bonds are now completely gone, and our annual cash interest expense has significantly reduced. Looking ahead, we have a few more tranches of debt that we can pay down with our cash flow, prioritizing our 6.75% secured notes as our next target. In a few quarters, our debt should be so low that it will no longer even be a discussion point and I look forward to talking about other ways of returning capital to our shareholders at that time. Our LTM EBITDA of 6.2 billion already implies leverage of 0.8 times, the lowest level for Cliffs in over 12 years. As you can also see from this morning's release, we only spent $20 million in share repurchases during Q1 executed opportunistically at very attractive prices. Other than this, we used most of our remaining free cash flow generated during the quarter toward paying down debt as discussed. Going forward, we will continue to favor debt reduction over share repurchases in the near term, and buybacks will continue to be only opportunistic. In closing, because of our domestically sourced raw material supply chain, as well as our heavy weighting towards fixed price contracts, our 2022 financial outlook is very compelling, with strong margins, record levels of free cash flow and equity value creation through a massive conversion of total enterprise value to market value via debt reduction. This makes us feel a lot better. While the share repurchases have boosted shareholder value, increased EPS potential, and reduced the float, we like that management is prioritizing debt reduction. However, repurchases will be done "opportunistically". We are willing to be this means that shares will be bought perhaps around our buy levels, but we think definitely if shares fall under $20. Too cheap. Despite the scary outlook for the world and the economy, we want you in stocks that offer value and growth. CLF offers both. Yes, the fear is growth will cease, but for now, it looks good. After these amazing times, when steel eventually comes back down a lot in price, or demand softens up a lot, Cleveland-Cliffs will be a completely transformed company from a balance sheet perspective. They are knocking down debt and buying back shares. They have made operational decisions that will benefit shareholders for a long time. After a massive 33% pullback in two months, we think it is time to drip into this stock for a bounce, and to profit in the short-term as the market bids the stock back up. Let it come down a bit more, then pounce. Our members are thriving during this chaos, and you should be too Stop wasting time and join the community of traders at BAD BEAT Investing. Access an expert team of 4 analysts, available all day during market hours. Rapid-return trade ideas each week with crystal clear target entries, profit levels, and stops, and we protect you on the downside Stocks, options, trades, dividends, and one-on-one portfolio reviews Money-back guarantee Education, tools, and conversation This article was written by We have turned thousands of losing investors into WINNERS. We are the team behind the top performing trading service BAD BEAT Investing. Quad 7 Capital was founded in 2017 by a team that consists of a long time investor, health researcher, financial author, professor, professional cardplayer, and a politician. The BAD BEAT Investing service launched in 2018 and is a top performing Marketplace service relative to market returns. It is focused on extreme value, and leveraging mispriced stocks and momentum driven events for rapid return swing trades, options education, and long-term investments. Further, it offers a direct access line to our traders all day during market hours. Quad 7 Capital as a whole has expertise in business, policy, economics, mathematics, game theory and the sciences. The company has experience with government, academia, and private industry. We offer market opinion and analysis, and we cover a wide range of sectors and companies, with particular emphasis on news related items and analyses on growth companies, cryptocurrencies, REITS, biotechnology/ pharmaceuticals, precious metals, blue chips and small-cap companies. If you want to win, follow us, and if you want to make money, sign up to BAD BEAT investing today. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CLF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

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