Stock in Cleveland-Cliffs Rises on Strong Earnings and Share Buyback Focus

Shares of steel maker Cleveland-Cliffs experienced a boost on Tuesday as investors processed the company’s latest earnings report and its increased emphasis on “aggressive share buybacks.”

Cleveland-Cliffs reported a loss of 5 cents per share in the fourth quarter of the fiscal year, generating $5.2 billion in sales. This performance aligned with the expectations of Wall Street analysts.

While a quarter that meets expectations typically does not lead to significant stock gains, Cleveland-Cliffs’ management provided a promising outlook for 2024, which contributed to the positive market response.

The company anticipates that its earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter will surpass the previous quarter’s $254 million. Analysts project a first-quarter EBITDA of $742 million. It is important to note that steel companies generally refrain from offering precise guidance due to the unpredictable nature of commodity price fluctuations.

Additionally, Cleveland-Cliffs aims to reduce costs by approximately $30 per ton in 2024. With a shipment volume of 16.4 million tons in 2023 and an approximate EBITDA of $115 per ton, a $30 reduction can have a significant impact.

According to Citi analyst Alexander Hacking, these cost-cutting measures align with previous expectations, suggesting that guidance is not the primary driver behind the stock jump.

Interestingly, aggressive share buybacks appear to be the key catalyst for Tuesday’s trading activity. CEO Lourenco Goncalves emphasized in the company’s earnings release that, “with our net debt target accomplished and our shares still undervalued, we can now prioritize aggressive share buybacks.”

Cleveland-Cliffs concluded 2023 with $2.9 billion in net debt, which is below the company’s target of $3 billion.

Overall, the combination of strong earnings, positive future prospects, and a renewed focus on share buybacks has propelled the stock of Cleveland-Cliffs forward.

Share Repurchases Remain Cliffs’ Priority

According to a report by B. Riley analyst Lucas Pipes, Cliffs continues to prioritize share repurchases as a use of its free cash flow. This shift in focus comes after the company’s plans to merge with United States Steel fell through. Cliffs had submitted a bid of approximately $35 per share for U.S. Steel, but Japanese steel giant Nippon Steel outbid them with an all-cash offer of $55 per share.

During a conference call, Cliffs management disclosed that their final bid for U.S. Steel included $27 in cash and $27 in Cliffs stock per share. Despite this offer, it was deemed insufficient by the U.S. Steel board.

On the call, CFO Celso Goncalves expressed his belief that U.S. Steel had overestimated the regulatory antitrust risk associated with Cliffs, disregarded the concerns of the union, and miscalculated the political risks associated with Nippon. Goncalves emphasized the potentially negative implications for supply chains and national security.

While regulators are still evaluating the Nippon-U.S. Steel merger, it is noteworthy that Japan is a U.S. ally and Nippon is a larger and more technologically advanced steel manufacturer. The merger would bring Nippon’s cutting-edge technology to the United States. However, there is sentiment attached to the name U.S. Steel that carries weight in Washington.

As of midday trading on Tuesday, Cliffs stock has experienced an approximate 8% decline over the past year. Currently, shares are valued at around 11 times Wall Street’s estimated 2024 earnings. In comparison, the S&P 500 trades at a multiple closer to 20 times. It is important to note that steel makers typically do not have valuation multiples resembling those of growth-oriented industries. Due to the cyclical and slower-growing nature of the business, steel industry valuations are typically lower.

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