CLF: Tariff Pressures And New Auto Contracts Will Shape Fair Value Outlook

Key Takeaways

• Strong domestic demand, tariff protection, and OEM reshoring drive higher sales volume, pricing power, and improved profit margins for Cleveland-Cliffs.
  
• Cost reductions, asset sales, and investments in specialty steels enhance financial resilience, market expansion, and support structurally higher earnings.
  
• Reliance on protectionist steel tariffs, legacy blast furnace technology, and high automotive exposure pose structural risks to competitiveness, profitability, and market relevance as industry trends evolve.

Catalysts

About Cleveland-Cliffs

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

What are the underlying business or industry changes driving this perspective?

• Sustained enforcement and recent increases of U.S. steel tariffs have materially reduced imports, driving higher domestic demand and pricing power for Cleveland-Cliffs. This, along with reshoring in automotive and appliances, positions the company to benefit from greater sales volumes and improved revenue visibility as protectionist trade policy endures.
  
• OEMs are shifting automotive manufacturing capacity and supply chains back to the United States, accelerating orders for domestically produced steel. Cleveland-Cliffs' underutilized automotive steel capacity and established OEM relationships enable rapid volume ramp-up, directly supporting potential EBITDA growth and net margin expansion as demand recovers.
  
• Strategic footprint optimization, internal coke and feedstock integration, and direct moves to lower fixed costs and SG&A have already resulted in unit cost reductions. Ongoing initiatives are expected to deliver further cost savings, driving enhanced free cash flow, lower leverage, and a structurally higher earnings profile through improved operating margins.
  
• Asset sales and ongoing working capital reductions are set to accelerate deleveraging and unlock latent value. Proceeds from noncore divestitures provide additional flexibility for debt paydown, lowering interest costs and improving both net margins and financial resilience.
  
• New investments in higher-margin stainless and specialty steels, buoyed by infrastructure investment, electrification, and clean-energy buildout, will expand Cleveland-Cliffs' addressable markets and support lasting product mix improvement, increasing revenue growth and supporting higher average selling prices.

Cleveland-Cliffs Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Cleveland-Cliffs's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.5% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.0) by about September 2029, up from -$866.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.5 billion in earnings, and the most bearish expecting $533.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.4x on those 2029 earnings, up from -8.2x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.88%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Cleveland-Cliffs' long-term competitiveness and cost structure remain heavily dependent on the continued enforcement of Section 232 steel tariffs; any softening, exemptions, or eventual removal of these protectionist trade measures could re-expose the company to global overcapacity and price competition, negatively impacting revenue and net margins.
  
• The company's integrated blast furnace footprint relies on coal, coke, and natural gas, with management confirming the absence of near-term hydrogen-based decarbonization projects; persisting with legacy steelmaking technologies exposes Cliffs to escalating regulatory costs and customer pressures stemming from global decarbonization trends, leading to higher capex requirements and possible demand risks as automotive and industrial clients seek greener alternatives.
  
• Elevated leverage from recent acquisitions is only partially offset by targeted asset sales; if working capital releases and noncore divestitures fall short or market conditions deteriorate, Cleveland-Cliffs' ability to rapidly deleverage and reduce interest burden may be constrained, increasing earnings volatility and risk to free cash flow.
  
• The company faces significant exposure to automotive OEMs, with recovery in volumes and capacity utilization tied to U.S. auto production; any structural shift toward lighter, alternative materials, slow EV adoption rates, or persistent consumer financing challenges could erode steel intensity in vehicles and pressure Cleveland-Cliffs' long-term revenue base and pricing power.
  
• The ongoing shift in the North American steel market towards electric arc furnace (EAF) mini-mills and increased reliance on scrap-based steel threatens Cliffs' market share and profit margins in the long term, as its existing blast furnace operations may become less cost-competitive and require substantial reinvestment to remain relevant in a decarbonizing industry.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $12.0 for Cleveland-Cliffs based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $23.2 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 11.9%.
• Given the current share price of $12.5, the analyst price target of $12.0 is 4.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.