Tariff Upsides And Dumping Pressures Will Shape Future Prospects

Key Takeaways

• Weak demand in crucial sectors threatens revenue, compounded by stiff foreign competition impacting net margins.
  
• Debt reliance poses risks, with rising interest rates potentially hampering cash flow and growth investments.
  
• Cleveland-Cliffs' revenues and profit margins may improve due to increased demand and favorable tariff environments, further supported by synergies from acquisitions.

Catalysts

Operates as a flat-rolled steel producer in the United States, Canada, and internationally.

• Prolonged weak demand from key sectors like automotive and construction has negatively impacted Cleveland-Cliffs, leading to idle facilities such as the C6 blast furnace. This is likely to cause revenue stagnation if demand does not recover as expected.
  
• The company faces significant pressure from foreign competitors, who continue to engage in practices like dumping cheap steel into the U.S. market. This could lead to compressed net margins as Cleveland-Cliffs struggles to compete on price.
  
• Despite recent tariff implementations, the uncertainty around tariff policies and potential retaliations from trade partners could disrupt pricing stability and increase costs, potentially affecting earnings.
  
• The acquisition of Stelco, while offering synergy opportunities, also presents integration risks. Any delay or failure to realize the expected $120 million in synergies could lead to disappointing earnings below expectations.
  
• Cleveland-Cliffs' heavy reliance on debt and focus on debt reduction suggests vulnerability to rising interest rates, which could increase cash flow burdens and detract from potential investments in growth opportunities, impacting future earnings growth.

Cleveland-Cliffs Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cleveland-Cliffs compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cleveland-Cliffs's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -6.3% today to 2.3% in 3 years time.
• The bearish analysts expect earnings to reach $497.1 million (and earnings per share of $0.74) by about July 2028, up from $-1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from -3.8x today. This future PE is lower than the current PE for the US Metals and Mining industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 5.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.53%, as per the Simply Wall St company report.

Cleveland-Cliffs Future Earnings Per Share Growth

Risks

• Cleveland-Cliffs is seeing a strong increase in its order book and lead times for hot-rolled steel are extending, indicating that revenue may see significant improvement in 2025.
  
• The imposition of 25% tariffs on steel imports by the Trump administration could significantly enhance domestic steel pricing, benefiting Cleveland-Cliffs with higher revenue and improved net margins.
  
• Stelco's past performance during tariff periods suggests that revenue and earnings for Cleveland-Cliffs could improve in a similar tariff environment.
  
• The acquisition of Stelco is expected to yield $120 million in synergies, which could improve net earnings through cost reduction and operational optimization.
  
• Increased demand from the automotive sector and a recovery in market share could positively impact Cleveland-Cliffs' revenues and profit margins.

Valuation

• The assumed bearish price target for Cleveland-Cliffs is $5.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cleveland-Cliffs's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $21.6 billion, earnings will come to $497.1 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 10.5%.
• Given the current share price of $9.14, the bearish analyst price target of $5.0 is 82.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.