Cleveland Cliffs Stock Will Benefit From Recent Acquisitions and Rising Steel Prices

Cleveland Cliffs (NYSE:CLF) stock has very strong, positive catalysts, and the valuation of CLF stock remains quite low.

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Also keeping the shares quite attractive are the company’s very strong third-quarter results and its recent high-potential acquisition.

Although the housing boom is slowing, the sector is still fairly strong and is likely to remain so for at least the next few months. That’s positive for steel demand and steel prices.

The resolution of the chip shortage in the auto sector also is likely to keep steel prices elevated through the beginning of next year. As that shortage eases, automakers are going to be building vehicles to meet pent-up demand, causing steel to surge.

It also is worth noting is that Cleveland Cliffs is the largest supplier of steel to automakers according to CEO Lourenco Goncalves on the company’s third-quarter earnings conference call.

Further, Seeking Alpha’s Oakoff Investments, claims that China’s economic growth is likely to rebound relatively soon, forcing the country to remove most of the curbs that Beijing has placed on iron ore prices.

I agree with this thesis. Those price controls have caused industrial production in the Asian nation to drop. So as the price controls are rolled back, Chinese industrial production should rebound, pushing steel prices higher.

Meanwhile, amid signs that Chinese real estate company Evergrande is not going to hurt the country’s economy, steel prices are likely to climb.

A Closer Look at Cleveland Cliffs Stock

According to Goncalves, the company plans to renegotiate a number of its annual fixed contracts in 2022. This includes contracts for automotive, appliances, stainless, electricals used, plate and tin plates. Consequently, the company’s financial results are likely to soar next year, even if the U.S. housing market does weaken considerably then.

CLF stock also is likely to get a big boost from the bipartisan infrastructure bill and the Democratic budget likely to be passed by Congress.

After all, new bridges, new wind turbines, new train tracks and new electric-vehicle chargers all require steel.

On Oct. 11, Cleveland Cliffs announced that it would acquire Ferrous Processing and Trading Company, a “prime scrap” maker, for $775 million.

According to Goncalves, many new electric arc furnaces, (EAFs), which are used to make steel from scrap, are being launched, leading to shortages of scrap that will become more acute going forward.

Additionally, the deal will prevent Cleveland Cliffs from paying high prices for scrap and enable it to easily convert automakers’ own scrap into steel.

Ferrous Processing and Trading generated EBITDA of about $100 million in the 12 months that ended in August, so the deal should boost Cleveland Cliffs’ bottom line.

The Bottom Line on CLF Stock

The steelmaker reported very impressive Q3 results on Oct. 22 as its net income came in at $1.27 billion and its sales soared nearly 400% YOY, reaching $6 billion. Both numbers set quarterly records.

“Differently from other steel companies more exposed to spot prices, we believe that our average sales price next year should be higher than in 2021,” Goncalves said in a statement accompanying the results.

In a market with many stocks featuring extremely high valuations, CLF stock has a tiny forward price-earnings ratio of just 4.7, according to Yahoo Finance. 

Given Cleveland Cliffs’ many strong, upbeat drivers, all sorts of investors should feel comfortable buying the company’s shares at their current levels.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Remark. You can reach him on StockTwits at @larryramer.

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