On Monday, the largest flat-rolled steel producer in North America, Cleveland-Cliffs (CLF) , announced that the firm would be increasing current spot market base prices for all carbon hot rolled, cold rolled and coated steel products by a minimum of $100 per net ton, effective immediately.
As of now, Cleveland-Cliffs' minimum base price for hot rolled steel is $1,300 per net ton. Six weeks ago, in late February, Cleveland-Cliffs increased this price to $1,100 per net ton. This price was just $800 back in mid-January. Fact is that CLF, along with all of the other steel producers, has been raising prices regularly. This was the fifth price hike just in 2023 and came on top of more than a couple of late 2022 price hikes.
Times have been somewhat tough. The lackluster economic outlook out of China last month did not help. Input and labor costs have increased. Despite a bipartisan infrastructure plan that was supposed to stimulate this kind of business, the federal government remains hemmed in by an inability to borrow and spend as the debt ceiling beckons. Heck, the Biden administration was not even able to resupply the seriously depleted Strategic Petroleum Reserves when crude prices came in hard due to this condition.
Earnings Past
In Mid-February, Cleveland-Cliffs reported the firm's fiscal fourth quarter financial results covering the three months ended December 31st. These results were disappointing. The firm reported GAAP EPS of a loss of $0.41 on revenue of $5.04B. While these numbers fell short of Wall Street's expectations for both the top and bottom line, that revenue print also reflected a year over year contraction of 5.65%.
The whole year wasn't a bust. Q4 operating income of a loss of $115M and Q4 net income of a loss of $214M put full year operating income at $2.184B, and full year net income at $1.335B, which was good enough for a full year GAAP EPS of $2.56. Not so bad, unless you look at the comps and 2021 was a very good year. Full year operating income had actually contracted 48.9% year over year, while full year net income dropped 55.3% from a year ago.
Fundamentally, operating cash flow for the quarter was $489M, bringing the full year to $2.423B, as CapEx for the quarter printed at $227M, bringing the full year to $943M. Hence, full year free cash flow printed at $1.48B, down from $2.08B in 2021. The firm repurchased $240M worth of common stock throughout the year, while not paying out a dividend.
So, Where Did That Dough Go?
The balance sheet is still not in great shape, but it has been improved. Cliffs ended the year with a cash position of $26M (not a misprint) and inventories of $5.13B. That put current assets at $7.422B. Current liabilities added up to $3.549B, leaving the firm's current ratio at a quite robust 2.09. Less inventories, the firm's quick ratio drops to a far sloppier 0.65.
Total assets amounted to $18.755B. This includes goodwill and other intangibles of $1.344B. At 7% of total assets, this is not a problem. Total liabilities less equity came to $10.713B. This includes long-term debt of $4.249B, which was down 5% from a year earlier. The real improvement in this balance sheet is visible in Pension and other retirement liabilities. The firm was able to take this entry down 61.5% over the year to $1.058B.
Is this balance sheet fixed yet? Of course not. Just look at that cash to debt ratio, and the size of those inventories. This is why the stock trades at 10 times forward looking earnings. That said, the firm did produce positive free cash flow, even in the fourth quarter, which was not a profitable quarter, and does appear under this management to understand how to prioritize that free cash flow when one is stuck with a less than wonderful balance sheet.
Earnings Future
Cliffs is expected to report the firm's first quarter results in mid-May. Currently, the street is looking for GAAP EPS of a loss of $0.21, within a range of $-0.35 to $-0.14 on revenue of $5.2B, within a range spanning from $5B to $5.35B. At consensus, performance like this would compare to EPS of $1.50 for Q1 2022 and would show year over year revenue contraction of -12.7%, so the pain is not over.
Wall Street does expect to see a profit during the second (now current) quarter, and for the full year as well. By year's end, Wall Street expects the year over year revenue contraction to whither itself down to -6.6%.
Noteworthy
For what it's worth, on Monday, Morgan Stanley's five star rated (by TipRanks) analyst Carlos De Alba reiterated his "buy" rating on Cleveland-Cliffs as well as his $26 price target. This brings the number of five star analysts opining on CLF in 2023 to four. There are three "buys" and one "hold" with an average target price of $24.25.
My Thoughts
I think that in this environment, this is a tough name to invest in. That said, Wall Street seems to see a positive turn at some point during the current quarter. My expectation would be that if that positive change in trend is to be realized, that we will hear something about that in detail in mid-May.
Readers will see that CLF ran into trouble at the half-way back point (50% retracement) of the March 2022 through November 2022 selloff. Let's zoom in a little.
Now, readers can see that CLF formed a "double top" reversal early in 2023 with a $19 pivot that would have created a $16.50 target had I been short the stock (I was not, this is forensic). The stock, instead of reaching around for my target, found support at its 200 day SMA (simple moving average), which managed to pass two tests in March. Now, the stock contends with resistance at it's 21 day SMA.
My preference would be to trade this name between the 200 day SMA and the 50 day SMA if the stock can get there. Is the stock investable rather than tradable at the thin red line? If Wall Street is right about the next three quarters, then yes. if the US goes into recession or the World Bank is right about a lost decade for the entire planet, then no.
If I liked this name, and I know that some of you do... given that there is no dividend, I would rather write (sell) one May 19th (post-earnings) CLF $17 put for about $0.90 than wait for the stock to kiss the 200 day SMA. This way if the investor does get tagged, he or she will own that 100 shares at a net basis of $16.10. If it never gets there, that's still an $85 payday.
