Shares of steel marker Cleveland Cliffs (NYSE:CLF) stock have been rallying this month, up a healthy 16%, building on the momentum from June.
The company has been killing it of late with the relentless demand for steel across all sectors supported by strong prices.
Combine that with CLF’s cost efficiencies and vertically integrated business model, and you’re looking at an industry juggernaut.
CLF stock has performed exceedingly well in the past year. The stock is up over 72% in the past 12-months despite the challenges presented by the pandemic. Its underlying business has performed even better, with its free cash flows transforming its financial flexibility.
Despite the stellar performance, it’s trading at less than one times forward sales. CLF stock has tremendous upside potential given the spectacular performance of its underlying business and the macro-economic tailwinds.
Blowout Second Quarter Results
CLF recently reported its stellar second-quarter results, where it registered $5 billion in revenues compared to $1.1 billion in the same quarter last year. Moreover, it posted a net income of $795 million, or $1.33 per diluted share.
In the second quarter last year, it recorded a massive net loss of $108 million.
The company’s CEO Lourenco Goncalves talked about the relentless steel demand in the first couple of quarters of the year.
“Demand for steel is very strong across all sectors, and strong demand supports strong prices,” he said.
Moreover, CLF has raised its EBITDA guidance to $5.5 billion from previous estimates of $4 billion to $5 billion.
CFO Keith Koci talked in length during the earnings call about the impressive cash flow generation that is happening now. He expects the CLF to generate $1.4 billion in cash from its $1.8 billion in adjusted EBITDA in the third quarter.
These numbers result from increased prices on the CLF’s spot sales and hot-rolled coil (HRC) linked contracts. Its main priority is to increase free cash flows to pay down debt.
Koci believes that it has created an opportunity for the company to de-risk its balance sheet. All in all, CLF is positioned incredibly, as an integrated steel producer, with its 2020 acquisition activities beginning to improve margins.
Growth Catalysts
There are multiple growth catalysts for CLF stock that are likely to drive its price higher.
Its acquisitions of ArcelorMittal USA and AK steel have further cemented its market share in the U.S. steel market that only a few peers can match. The acquisitions have added to the supply shock sentiment that is going around in the sector.
The semi-conductor shortage has also played in the hands of CLF. It has diverted volumes for automotive companies to spot buyers earning higher margins in the quarter. Moreover, this strategy will be used through the conclusion of this year until demand from the auto industry returns, guaranteeing consistent sales growth.
The reductions in steel imports from China and Russia are massive tailwinds for CLF. China has been curtailing its raw steel crude production to ease pollution concerns and respond to the requests from OECD countries. The country has also raised tariffs on steel materials export in hopes of preserving domestic supply.
The Russian government has implemented similar measures to control commodity exports. The rising demand for steel in the U.S. and the drop in supply from international imports puts CLF in an incredible position to end the year with record growth.
Bottom Line on CLF Stock
Cleveland Cliffs have successfully weathered the Covid 19 storm and are posting record growth numbers. It benefits from the unabated demand for steel and the macro-economic conditions that have worked in its favor.
As a result, CLF stock has multiple growth drivers, which are likely to push the stock to new heights. Therefore, CLF stock is a highly attractive investment at current levels.
On the date of publication, Muslim Farooque 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.
