Cleveland-Cliffs (NYSE: CLF) reported Q2 earnings today for the period ended June 30, 2022. Q2 revenue of $6.3bn beats FactSet analyst estimates of $6.12bn, a surprise of 3.5%. While EPS of $1.14 missed consensus estimates of $1.32, a disappointing difference of -13.7%.
Steel producer Cleveland-Cliffs Inc (NYSE: CLF) has seen its share price fall over 21% year to date.
What Is Cleveland-Cliffs?
Cleveland-Cliffs Inc (NASDAQ: CLF) is North America's largest flat-rolled steel producer. The company supplies iron ore pellets to the North American steel industry. It engages in the production of metallics and coke, iron making, steelmaking, rolling and finishing, and downstream tubular components, stamping, and tooling.
The company is vertically integrated from mined raw materials, direct reduced iron, and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling, and tubing.
Cliffs was founded in 1847 as a mine operator and is headquartered in Cleveland, Ohio. The company employs approximately 27,000 people across its operations in North America.
The company is also North America's largest steel supplier to the automotive industry. It serves a diverse range of other markets due to its comprehensive flat-rolled steel products.
We also included Cleveland-Cliffs stock in our earnings preview this week.
Recent CLF Company News
Following its acquisitions of ArcelorMittal USA and AK Steel (announced in 2020) and the completion of its Toledo Direct Reduction plant, Cleveland-Cliffs is now a vertically integrated, high-value steel enterprise.
It now boasts the unique advantage of being self-sufficient, beginning with the extraction of raw materials by manufacturing steel products, tubular components and stamping and tooling.
Cleveland-Cliffs Stock Q2 2022 Earnings Results
Cleveland-Cliffs net income for Q2 came in at $601m, and adjusted EBITDA is $1.1bn.
This means CLF stock's half-year results amount to revenues of $12.3bn and a net income of $1.4bn. That's a total of $2.64 per diluted share. It's an improvement on the first six months of 2021, in which the company recorded revenues of $9.1bn and net income of $852m, or $1.42 per diluted share.
During the first half of 2022, Cleveland-Cliffs reported adjusted EBITDA of $2.6bn, compared to $1.9bn Y/Y.
Lourenco Goncalves, Cleveland-Cliffs' Chairman, President, and CEO, said:
Our second quarter results demonstrate the continued execution of our strategy. With free cash flow that more than doubled compared to the first quarter, we were able to achieve our largest quarterly debt reduction since our transformation began a couple years ago, while delivering substantial capital returns via share repurchases.
As we move into the second half of the year, we expect this healthy level of free cash flow to continue, as a result of declining capex needs, the accelerating release of working capital, and the heavy use of fixed price sales contracts. In addition, we expect to see further significant increases in the average selling prices for these fixed contracts resetting on October 1st.
As of July 19, 2022, the company had total liquidity of approximately $2.3bn.
During Q2, Cliffs repurchased 7.5 million shares at an average price of $20.92 per share.
The company also paid cash taxes of approximately $300m during the quarter.
The company incurred the following charges:
$66m, or $0.13 per diluted share, for debt extinguishment costs
$23m, or $0.04 per diluted share, in accelerated depreciation related to the indefinite idle of the Middletown coke facility
$6m, or $0.01 per diluted share, for severance costs
How Does Cleveland-Cliffs Make Money?
Cleveland-Cliffs makes money from selling various forms of steel. Notably, hot-rolled, cold-rolled, coated, stainless/electrical, plate, and other steel products. The end markets it supplies include automotive, infrastructure and manufacturing, distributors and converters and steel producers.
Q2 steel product sales volumes of 3.6 million net tons consisted of 33% coated, 28% hot-rolled, 16% cold-rolled, 7% plate, 5% stainless and electrical, and 11% other, including slabs and rail.
Meanwhile, Q2 steelmaking revenues of $6.2bn included:
$1.8bn, or 30%, of sales to the distributors and converters market
$1.6bn, or 27%, of direct sales to the automotive market
$1.6bn, or 26%, of sales to the infrastructure and manufacturing market
$1.1bn, or 17%, of sales to steel producers
CLF Stock Financials
CLF stock has a price-to-earnings ratio (P/E) of 2.5 versus the industry average of 0.8. Its price-to-book value (P/BV) of 1.4 is above the industry average of 0.9. Cleveland-Cliffs stock does not come with a shareholder dividend.
The net debt-to-EBITDA ratio gives us a rough idea of how long a company would take to pay off its debt. CLF stock's net debt-to-EBITDA ratio fell from 12.1 in 2020 to 1.1 in 2021. The high ratio in 2020 was due to the company's acquisitions. Before this, it sat around 3.4 for three years. The normalizing of the net debt-to-EBITDA ratio is reassuring to shareholders.
During Q2, the steelmaking cost of goods sold (COGS) included $242m in excess/idle costs. The most significant portion of this was related to the expanded scope of the Cleveland blast furnace #5 outage, which included additional repairs to the on-site wastewater treatment plant and powerhouse.
The company also saw rising costs in Q/Q and Y/Y figures as prices climbed in natural gas, electricity, scrap and alloys.
The CLF stock price is currently trading at $16.93.
CLF Growth Potential
Steel is a key component in the global energy transition giving CLF stock future staying power. Wind and solar power creation require copious quantities of steel.
Furthermore, domestic infrastructure must be overhauled on a grand scale to make way for the clean energy movement. This is an ideal situation for Cleveland-Cliffs stock, which has a good chance of benefiting from rising demand for domestically sourced steel.
Lourenco Goncalves, Cleveland-Cliffs' Chairman, President, and CEO, recently said:
Our industry leading exposure to the automotive sector separates us from all other steel companies in the United States. The health of the steel market over the past year and a half has been largely driven by the construction sector, with automotive lagging far behind -- mainly due to supply chain issues unrelated to steel. Nevertheless, with automotive demand outpacing production for more than two years now, the consumer backlog for cars, SUVs and trucks has become enormous.
As supply chain problems continue to be resolved by our automotive clients, pent-up demand for electric vehicles continues to increase, and light vehicle manufacturing catches up with demand, Cleveland-Cliffs will be the primary beneficiary among all steel companies in the United States. This important distinction of our business relative to other steel producers should become clear as we progress through the remainder of this year and into next year.
Based on the current 2022 futures curve, which implies an average hot-rolled coil steel index price of $850 per net ton for the remainder of the year, Cleveland-Cliffs expects its full-year 2022 average selling price to be approximately $1,410 per net ton. This incorporates the company's expectation of substantial increases in fixed price contracts resetting on October 1, 2022.
CLF Stock Risks
Cleveland-Cliffs is a company facing cyclical demand. This means its revenues will fluctuate, so the CLF stock price is prone to volatility.
Commodities are in flux as prices soared since the pandemic and war in Ukraine compounded supply chain disruption. But now, inflation and rising interest rates are leading to the global fear of recession which makes future demand uncertain.
Should You Invest in Cleveland-Cliffs?
In recent years Cleveland-Cliffs has transformed from being a diversified commodity company to a domestic iron ore producer and now the largest flat-rolled steel producer in the US and Canada.
Recession fear caused a pullback in CLF shares, but it's enjoyed a rebound in the past month.
FactSet analysts have an Overweight rating on the stock with a target share price of $25.82
For long-term investors, Cleveland-Cliffs stock may appear attractive. It's become a robust entity with the potential to do very well over a lengthier time frame.
Russia and Ukraine are two of the world's five biggest net steel exporters. Yet Cleveland-Cliffs does not rely on either, giving CLF stock a domestic advantage over peers.
However, with all the uncertainty in the world, projections for economic growth are vague. Manufacturing sentiment has fallen, and recession worries continue to weigh on commodity stocks.
Steel is a cyclical business, and although there are big-picture arguments for CLF stock to soar once more, the future is unknowable. Whether you should invest in Cleveland-Cliffs stock depends on your appetite for risk and investment time horizon.