Cleveland-Cliffs (NYSE:CLF) stock may be up nearly 317% in the past twelve months, but in the eyes of many investors, it’s far from topping out.
This enthusiasm is mainly due to the anticipated benefits from the trillion-dollar infrastructure bill currently being hammered out by the U.S. Congress.
The bill, which will fund a key part of President Biden’s agenda, could be a boon for the flat-rolled steel producer. Yet, getting this bill passed in a gridlock-prone U.S. Congress isn’t the only thing that put more points into the stock.
Another catalyst on the table? Today’s inflationary environment. Increased steel prices coupled with the savings realized from consolidating its steel company M&A (mergers and acquisitions) transactions from last year points to a large increase in cash flow.
In turn, the company can use this cash to bring its net debt to zero by next year (more below).
More than just a binary play on the infrastructure bill passing, consider it a buy, even after its incredible run in the past year.
CLF Stock and Recent News
Lately, two things have been top of mind among investors when it comes to Cleveland-Cliffs. First of course, is the infrastructure bill making its way through the legislative process. As of this writing, the bill has moved to the debate stage in the U.S. Senate. Odds look good of it passing, with most of the physical infrastructure plans staying as-is.
The second factor top of mind in recent weeks was its earnings release on July 22. Shares pulled back after earnings due to it missing earnings-per-share (EPS) consensus for the quarter ending June 30. Analysts expected EPS of $1.43, while actuals came in at $1.33 per share.
Earnings may have fallen short of expectations, but management’s guidance update does point to the second factor that could help propel the stock higher.
With booming steel prices, the product of post-pandemic inflation, as well as from the steel tariffs imposed by former President Trump, Cleveland-Cliffs anticipates its free cash flow this quarter (ending Sept. 30) to come in at $1.8 billion.
If these salad days continue, the company has the cash to de-leverage its balance sheet. In short, it has a way to further move the needle for shareholders in the quarters ahead. Whether or not Biden’s infrastructure plans become reality.
De-Leveraging Could Create Tremendous Value
Besides recovery tailwinds, there’s another factor that’s helping Cleveland-Cliffs deliver stronger results. That would be the upside from its merger with AK Steel, and acquisition of ArcelorMittal’s U.S. operations, in 2020.
The company is not only able to generate cost savings from integrating these operations. Post-merger, traditional steel production in America is basically a duopoly. Along with U.S. Steel (NYSE:X), the two steelmakers dominate the market.
CLF stock has already surged thanks to its “recovery mode” windfall. Even so, don’t think that it’s all out of runway after a triple-digit percentage run-up. The company has a solid way to parlay this increased cash flow into more value for shareholders via deleveraging.
As one Seeking Alpha commentator discussed in late June, the company plans to pay down a $1.6 billion lending facility by year’s end. On July 28, it announced a plan to buy back $1.2 billion in preferred stock, a move that reduces its dilutive share count by 10%.
Better yet, this is only the start. As CEO Lourenco Goncalves has stated, the steelmaker anticipates hitting “zero net debt in 2022.”
This aggressive debt reduction effort will not only result in higher earnings per share but will also increase the underlying value of each share of CLF stock.
Even if its valuation stays the same ($17.15 billion enterprise value), getting rid of debt could increase its market value up that level, from the $11.1 billion it stands at today. That’s $34.34 per share, around 44% above today’s trading price ($23.80 per share).
Bottom Line: Further Gains Are Possible
Admittedly, there are some risks that could halt Cleveland-Cliff’s de-leveraging plans. As InvestorPlace’s Larry Ramer discussed July 24, new talks between the U.S. and the E.U. could mean a reduction (or an end) to the Trump-era steel tariffs.
This, along with the risk “recovery mode” demand starts to cool, could mean lower steel prices. In turn, lower free cash flow in the quarters ahead.
Yet, as Ramer also pointed out, political optics may keep the Biden administration from getting rid of the policies that have benefited domestic steel producers.
If today’s inflation isn’t “transitory,” as the Federal Reserve likes to call it, steel prices could remain near their highs.
So, with the infrastructure bill catalyst, along with a catalyst that could play out, whether said bill passes or not, what’s the verdict on CLF stock? With room to add to its epic gains in the past twelve months, consider it a buy at today’s prices.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
