(Cleveland Cliffs) (CLF)

Overview of the Company - Cleveland Cliffs is headquartered in Cleveland, Ohio and supplies iron ore products and steel. A large revenue source is providing the steel needed for cars in the auto industry. They are around a $10 billion dollar market cap.

Fundamental Analysis - If CLF is able to surprise investors as the economy reopens, CLF has a good chance to outperform the market. Commodities were red hot this year and with strong demand for automotives, CLF has benefited a lot during the year. However, there may be no more room to run as many believe that the run from $4 - $20 in a year and a half is going to be it for a while for this stock. This is yet another cyclical company that will be reliant on the stability of the American economy and its earnings growth.

How (CLF) Stacks Up to Competitors - We will be comparing Cleveland Cliffs with the U.S. Steel company (X), Nucor (NUE), and Vale (VALE). Vale is a little bit different from the crowd as they engage in the iron ore industry, but is then used in turn for steel making, making it relevant to compare with the industry. Vale is also headquartered in Brazil. The other companies are headquartered in the United States, CLF from Cleveland, X from Pittsburgh and NUE from Charlotte. Obviously these companies are going to be heavily tied to the American economy. In very industrial cities, these companies will rely on the strength of the American economy in order to thrive. As for Vale in Brazil, we will examine why they may actually be as attractive as companies in the American economy from a valuation standpoint. Starting with the P/E ratio, we can see how cheap these companies really are - if you believe there will be a strong economic upturn. If not, some of these companies are quite expensive. CLF trades at an 11 multiple, X at < 6, NUE < 10, and Vale at a little over 3. All three America based companies are very similar in their profit margin and return on assets, but due to high wages and overhead, it is not a surprise that VALE blows the Americans out of the water in terms of profit margin and return on assets. However, all four companies have experienced huge revenue and earnings growth over the last year, but it is important to note that so has their stock price. Vale continues the battering in the balance sheet, book value is in the $40’s while it trades at around $15. For reference, Nuecor trades at twice its book value and CLF three times. X trades right around its book value. In terms of cash vs debt, CLF seems low on cash in relation to its debt. The others have a level of cash very close to their debts, but VALE seems like the clear winner with huge cash flow relative to their company size. They display this as large inflow of cash as they offer around a 20% dividend yield. Glancing at the balance sheet and company statistics, VALE is a clear runaway winner - if you're willing to leave the United States.

Bull Case - CLF is a pure American economy play. In the industry growth is relatively slow, and that is why the stock trades so cheaply. However, there is still room for growth when the economy reopens. Not to mention that CLF gets a lot of its revenue from the automotive industry as they use their steel. We all know how high demand for cars is at the moment, this can only bode well for CLF as they will be able to ensure revenue. Earnings increases will help CLF prove that it deserves to trade at a premium.

Bear Case - The general trend in the American economy for people to move away from industrial sectors. The economy is facing serious issues from our rising debt to the government not being able to decide on a good rebuilding plan. There is a tough road for CLF in an industry where growth is already hard to find as it is. Plus, increasing wages and costs of living and running a business in the United States will surely eat into profit margins.

Valuation and My Price Target - I think CLF is appropriately valued right now but i believe that it will be hard to maintain this growth with big year over year earnings increases. I think CLF with misses in the last three quarters is trouble trading at a more market level P/E which will bring the stock price down. I think that going forward, CLF will either miss the high expectations for this quarter. With expectations of 2 dollars per share earnings, CLF will likely miss on its fourth quarter in a row. This won't be too bad for the stock but i think in the next year it can reach $3.45 in EPS. Multiply this by a more reasonable multiple of 7 times EPS, and you get CLF trading at around $24 a share. This is an extremely low estimate at EPS numbers and we are also factors that cLF will trade at a lower multiple. Therefore we could very well see this company shoot through this price target if they can achieve earnings beats. By going off past performances, I'm not sure they will be able to.

The Verdict - BUY HOLD SELL

I think there are better companies in this space. I think the steel industry in the United States is incredibly competitive and the whole sector is too reliant on an expanding economy. Furthermore, there are cheaper options outside of the United states. Even though my price target indicates over 22% return, CLF will need to rapidly increase earnings to do so. Vale does not. Additionally, Vale’s balance sheet is just too lucrative and offers such a better dividend compared to no dividend at all from CLF. My verdict on CLF will be a HOLD.

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