We came across a bullish thesis on Cleveland-Cliffs Inc. (NYSE:CLF) on Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on CLF. Cleveland-Cliffs Inc. (NYSE:CLF)’s share was trading at $9.90 as of Jan 6th. CLF’s trailing and forward P/E were 133.67 and 15.22 respectively according to Yahoo Finance.
A steel coil being loaded into a facility for further processing and distribution.
Cleveland-Cliffs (NYSE:CLF) represents a compelling turnaround story under the leadership of CEO Laurenco Goncalves, who took the helm in 2014 following an activist campaign by Casablanca Capital. Goncalves has transformed Cliffs from a struggling iron mining company with a negative tangible book value per share of -$11.32 into North America’s second-largest vertically integrated steel producer, boasting a tangible book value of $15.16 per share. Over the past decade, the company has expanded its operations dramatically, growing from 2,500 employees and $2.5 billion in revenue to 30,500 employees and peak revenue of $23.6 billion in 2022.
Cliffs’ evolution has been marked by a dual focus on operational efficiency and strategic acquisitions, including AK Steel in 2019, ArcelorMittal USA in 2020, and most recently, Stelco. These acquisitions have solidified Cliffs’ position as a low-cost steel producer with a vertically integrated model spanning iron ore mining, steel manufacturing, and coke processing. Notably, management has consistently under-promised and over-delivered on synergy expectations, highlighting a disciplined approach to execution. For instance, the $120 million in expected annual synergies from Stelco are limited to SG&A savings, leaving significant upside potential from operational efficiencies, particularly in coking coal cost reductions.
While steel is inherently cyclical, Cliffs has positioned itself to weather downturns with a healthy balance sheet and manageable leverage of 2.5x EBITDA post-acquisition. The company has also made substantial progress in capital allocation, retiring $3.8 billion in legacy pension obligations, paying down $1.5 billion in debt, and buying back $1.1 billion in shares since 2022. However, near-term priorities will shift back to debt reduction to strengthen the balance sheet further, especially as the company anticipates stronger steel prices in 2025, tied to an expected rate-cutting cycle and increased construction spending.
At its current valuation, Cliffs trades at a mere 0.23x price-to-sales and 0.65x price-to-book, significantly below its historical multiples. With peak sales potentially reaching $28 billion and tangible book value continuing to grow by over $2 per share annually, a reversion to historical multiples could imply a share price of $40 to $56 in the next three to four years, representing a potential 4x-5x return.
In summary, Cleveland-Cliffs is an undervalued cyclical play with a proven management team, disciplined capital allocation, and significant upside tied to a steel market recovery. For investors willing to ride out the cycle, CLF offers an exceptional risk/reward profile with a target price of $40-$56 by 2027-2028.
Cleveland-Cliffs Inc. (NYSE:CLF) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 40 hedge fund portfolios held CLF at the end of the third quarter which was 33 in the previous quarter. While we acknowledge the risk and potential of CLF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CLF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.