With a 3.3 Forward P/E Ratio, Cleveland-Cliffs Is a Great Deal
Cleveland-Cliffs (NYSE:CLF) reported strong second-quarter results on July 22, while the valuation of CLF stock remains extremely low. Also importantly, the macroeconomic and geopolitical pictures are upbeat overall for the steelmaker.
Given these points, I recommend that longer-term value investors buy CLF stock. The company saw its stock price rise by approximately 5% throughout July 22 following the positive earnings news.
Strong Second Quarter Earnings
Even with the important caveat that Cleveland-Cliffs had easy comparisons with the second quarter of 2020 because of the coronavirus pandemic, the company’s year-over-year gains were quite impressive.
Specifically, its top line jumped to $5 billion last quarter, versus just $1.1 billion during the same period a year earlier. And its earnings per share soared to $1.33, compared with a per-share loss of 31 cents in Q2 of 2020.
Obviously, the company is benefiting tremendously from the extremely strong demand for cars and new homes in the U.S., as well as home-improvement products, such as playground equipment, desks, furniture, and appliances.
Strong Positive Macro and Geopolitical Catalysts
As of the beginning of this month, the benchmark price of hot-rolled steel had reached a record $1,825, up from $500 to $800 prior to the pandemic.
Although steel prices are likely to ease as production catches up to demand, they should remain quite elevated as the micro trends that I mentioned previously persist.
Meanwhile, even though economic growth in China is slowing, it’s still extremely strong. The Asian country’s GDP jumped 7.9% year-over-year in Q2, down from 18.3% in Q1.
Moreover, Levi Strauss (NYSE:LEVI) and Pepsi (NASDAQ:PEP) both recently made positive comments about the Chinese economy, with the jeans maker reporting that its sales in Q2 had risen 3% versus the same period in 2019.
Also noteworthy is that Europe has launched a huge economic stimulus initiative, while the U.S. is poised to do the same. Both stimulus packages focus heavily on renewable energy, including wind power, which is quite steel-intensive.
And the transition to electric vehicles — which is mandated by law in the EU, California and China — could cause auto sales and production to climb even higher in the longer term, as manufacturers make many more EVs to comply with the standards and tens of millions of consumers rush to buy their first EVs.
Taken together, all of these trends should tremendously help Cleveland-Cliffs and CLF stock in the near-term, medium-term, and long-term.
The Geopolitical Picture
For Cleveland-Cliffs and other U.S.-based steelmakers, I believe that the geopolitical situation is mixed, but positive overall.
Specifically, the EU and U.S. have launched talks that seem to be aimed at eliminating the 25% tariff on steel imposed by the administration of former President Donald Trump. Obviously, the elimination of the tariff, accompanied by no countering moves, would have a meaningful, negative effect on Cleveland-Cliffs and other U.S.-based steel producers.
However I believe that the Europeans at this time vastly prefer the Democratic Party over the Republican Party, which remains heavily influenced by Trump.
Therefore, I don’t expect a final deal on the steel tariffs to meaningfully hurt the U.S. steel industry, since such an outcome could meaningfully damage the Democrats’ chances of retaining the White House and Congress.
The sides may agree to lower the tariff by 15% to 30% while implementing production ceilings and/or enacting some sort of export quotas. Both of the latter two measures would help keep prices elevated.
And again, I think it’s highly unlikely that any steps taken by the EU and the U.S. will damage the U.S. steel industry, including Cleveland-Cliffs.
The Bottom Line on CLF Stock
Making the shares a great name for value investors, Cleveland-Cliff’s forward price-earnings ratio is a truly miniscule 3.3, according to Yahoo! Finance. What’s more, the company’s positive catalysts make it an excellent name for growth-at-a-reasonable price (GARP) investors.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
