UKRAINE – 2019/02/13: In this photo illustration, the Cleveland-Cliffs Inc. Mining company logo … [+]
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After almost a 50% decline in Cleveland-Cliffs’ (NYSE: CLF) stock since the beginning of this year, at the current price of $4 per share, we believe Cleveland-Cliffs’ stock is likely to remain around the current level considering the impact of the ongoing coronavirus crisis. The stock is down over 50% compared to where it was at the beginning of 2018, a little over 2 years ago. Our dashboard What Factors Drove 43% Change In Cleveland-Cliffs Inc. Stock Price Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
Some of the stock price rise between 2017 and 2019 is justified by the roughly 6.6% growth seen in Cleveland-Cliffs revenues from 2017 to 2019, which was offset by 20% decrease in net income on account of lower margins. Decline in EPS was lower at 17%, mainly due to 4% drop in shares outstanding due to the company’s buyback program.
The drop in Cleveland-Cliffs’ earnings was more than offset by a significant rise in the company’s P/E multiple until 2019. CLF’s P/E multiple increased from 5.4x in 2017 to 7.9x in 2019, which reflects a P/E rise of 45% in 2 years. The rise in P/E multiple between 2017 and 2019 was mainly due to higher revenues, the company’s expansion plans, and rising iron ore prices. However, the P/E multiple has dropped sharply from 7.9x at the end of 2019 to 3.7x currently, mainly due to the impact of the coronavirus crisis, which we explain below.
Effect of Coronavirus
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The iron ore demand from industry players affects global iron ore price levels, in turn impacting the company’s price realization for its products. Lower demand from construction players and shedding of capacity by major steel companies, mainly in China, has led to a drop in global iron ore prices recently. Additionally, with the outbreak and spread of coronavirus expected to lead to further slowdown in economic activity and demand, iron ore prices are expected to remain under pressure in the near term. We believe Cleveland-Cliffs’ Q1 results will confirm the hit to its revenue. It is also likely to accompany a lower Q2 and lower 2020 guidance.
CLF’s stock is down by about 44% since January 31 after the World Health Organization declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 20%. Thus, CLF’s stock has performed worse than the broader market during this crisis so far. If there are signs of containment of the virus around the Q1 earnings announcement, there is a possibility of a healthy upside for the stock. On the contrary, in the absence of any clear signs of virus containment by the end of April, the stock could hover around $3-$4 level.
View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.