When you see CLF, some investors may instinctively recall Cliffs Natural Resources. But these days its Cleveland-Cliffs (NYSE:CLF) and shares have been on fire. CLF stock is up almost 50% so far in 2018.
With that kind of rally, some investors are beginning to wonder if Cleveland-Cliffs is a name they should have on their radar or if it’s one they’ve already missed.
Just last week, CLF crushed both earnings and revenue expectations. Sales of $714 million grew more than 50% year over year (YoY) and beat analysts’ estimates by about 10%. Earnings of 76 cents per share came in way ahead of estimates of 52 cents per share.
In a press release, Chairman, President and CEO Lourenco Conclaves said:
“After almost four years of consistent execution of a well-designed and thoroughly implemented strategy, our company has become a very powerful cash-generating enterprise…The following quarters should be a continuation of this strong second quarter, with the added positive contribution of the usual favorable seasonality of warmer weather during the entire second half of the year. As a consequence, we expect to generate in 2018 a level of free cash flow that we have not seen in years.”
I added bold emphasis to highlight why last quarter wasn’t just a one-time wonder. JPMorgan analysts seem to agree, as they were quick to upgrade the stock after the report. They went from “neutral” to “overweight” and put a $15 price target on CLF stock. From current levels, that still implies more than 40% upside.
Valuing CLF Stock
Just because CLF stock is up significantly over the past 12 months, doesn’t necessarily mean it’s expensive. For the year, analysts now expect earnings per share of $1.78. That’s a more than fourfold increase from last year’s results and leaves CLF trading at just 5.9 times earnings.
While analysts have already bumped their full-year estimates for 2018 by 20% over the past week, it will be interesting to see whether CLF can continue to beat these numbers.
Could these estimates be conservative? We already saw what Conclaves said — that the third and fourth quarters would be a continuation of the impressive second quarter CLF just had. Given the large margin in which CLF beat estimates by, perhaps shares are even cheaper than they currently appear.
As earnings are going through the roof, sales are forecast to climb just 3% this year. This essentially means that margins are expanding by a significant amount, as free-cash flow continues to widen. 2019 estimates call for a contraction in both earnings and sales, but if the company can maintain momentum, these estimates are almost surely heading higher.
CLF can use this increasing cash flow to bolster its ~1.5% dividend yield and cut down on some of its $2.3 billion in debt.
Trading CLF Stock
Click to Enlarge
So, how do we trade this monster stock? Above is a multi-year weekly chart, which shows how significant the $9-$10 range is. As long as CLF stock is above this mark, bulls should feel okay.
Also worth pointing out is the solid trend-line of support, currently near $6 to $7. Should CLF find itself back near this level, it means something has gone horribly wrong — be it stock-specific or a large, broad market pullback. Because if nothing changes with Cleveland-Cliff’s story, there’s no reason shares should end up back down there.
On the upside, CLF’s 2017 highs are a reasonable target, near $12.50. That’s about 20% above current prices. So long as shares stay above the $10 level, the current pullback is likely just a digestion of the recent rally. At this valuation and above support, it’s hard to be too bearish on CLF stock.
InvestorPlace‘s Harriet Lefton nailed this move too, putting CLF on her 10 Strong Buys Under $10 List. Names like Zynga (NASDAQ:ZNGA) and LendingClub (NYSE:LC) also made the list, but it’s worth checking it out.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
