How CLF Stock Reacted to Credit Suisse’s Double Upgrade
At one point following Credit Suisse’s (CS) upgrade, Cleveland-Cliffs (CLF) stock was trading at a rise of more than 6% on February 7, 2018.
On February 7, 2018, Credit Suisse upgraded Cleveland-Cliffs stock two notches from “underperform” to “outperform.” It also raised the stock’s target price by 80% from $5.0 to $9.0.
In this part, we’ll discuss how markets are valuing Cleveland-Cliffs’ (CLF) stock versus its peers and its historical multiple.
Currently, all US steel stocks, as well as seaborne iron ore stocks (PICK), have positive trailing three-month stock returns. U.S. Steel (X) has given the highest returns among these companies at 26.0%.
The recent indicators from China signal a slowdown in the Chinese property market. In 2017, total property investment in China grew 7% year-over-year (or YoY). This figure reflects year-over-year (or YoY) growth of 0.1%.
China’s demand for seaborne iron ore dictates the commodity’s price because it consumes more than 70% of seaborne-traded iron ore (COMT).
Iron ore prices showed a lot of volatility in 2017, which is continuing well into 2018. Toward the end of January 2018, prices started falling. This weakness can mainly be attributed to weak physical demand in China due to seasonal factors.
Steel prices are the major driver of steelmakers’ earnings and revenues. According to Platts, US steel prices rose 17.5% on average compared to 2016. The steel price momentum started showing upward movement in December 2017.
In the US steel sector, demand for steel drives revenues for US steelmakers (SLX)(XME). As a result, investors interested in Cleveland-Cliffs (CLF) track US steel demand.
US steel production is the key variable that drives revenues for US steelmakers (SLX). US steelmakers such as AK Steel (AKS) are Cleveland-Cliffs’s (CLF) customers.
The US iron ore segment contributes to the majority of Cleveland-Cliffs’ (CLF) revenues and earnings. Cliffs investors track imports data, which directly impact Cliffs’s customers such as AK Steel (AKS).
The 4Q17 earnings season for US steelmakers has come to an end. Cleveland-Cliffs (CLF) released its 4Q17 and 2017 earnings on January 25 before the market opened.
Industrial output measures the output of businesses involved in the industrial sector, while fixed asset investment (or FAI) measures capital spending. It’s a good indicator of investment occurring in a country or region.
Aggregate financing in China (MCHI), which reflects the total funds provided by a financial system to its nonfinancial sectors and households, came in at 1.14 trillion yuan in December 2017.
Auto sales (XLY) in China grew 0.1% year-over-year (or YoY) to 3.1 million units in December 2017. This growth rate is lower than the 0.7% recorded in November 2017.
It’s vital for iron ore investors to track movements in the Chinese real estate market (TAO). This sector constitutes more than 50% of the total steel consumed in the country.
We discussed, in the previous part of this series, how Chinese steel mills have increased their production in 2017 to take advantage of higher steel prices.
China’s steel production in 2017 was strong overall. Production volumes were supported by strong demand and higher steel prices.
China consumes more than 70% of the seaborne-traded iron ore. Therefore, to gauge the direction for future iron ore prices, it’s important to look at Chinese iron ore imports.
Inventories at China’s ports reflect the balance between demand and supply. The ore that isn’t used up by steel mills typically piles up at ports.