What happened
Shares of U.S. steelmaker Cleveland-Cliffs (CLF -11.03%) surged 30.5% in the month of February, according to data from S&P Global Market Intelligence.
Cleveland-Cliffs reported earnings in early February and later had another significant company-specific announcement, but the stock really took off as the conflict between Russia and Ukraine heated up because both are suppliers of pig iron to other U.S. steelmakers. Pig iron is a key input in the manufacturing of raw steel, but Cleveland-Cliffs has invested in a process that uses an alternative material, meaning it is insulated from supply disruption due to the war.
So what
For the fourth quarter, Cleveland-Cliffs reported surging revenue and profits. Revenue was up 137% over the prior-year quarter, and earnings per share of $1.69 rocketed 1,100% in comparison to Q4 2020. Remarkably, those growth figures were below consensus estimates, as there was a surge in steel prices last year.
However, that shortfall was partly intentional. Automotive clients fell victim to their own supply chain issues, so Cliffs decided to perform maintenance in Q4, which curtailed supply. CEO Lourenco Goncalves said in the Feb. 11 press release:
During Q3 of last year, we realized that our automotive clients would not be able to resolve their supply chain issues in Q4, and therefore demand pull from the sector would be weak. That would come on top of the widely expected lighter demand from service centers in Q4. As such, we elected not to chase weak demand and instead accelerated maintenance forward to Q4 at several of our steel production and finishing facilities. These actions had a short-term impact on our unit costs in Q4 but should benefit our 2022 results.
After the earnings report, Cleveland-Cliffs announced in the latter part of the month that it was shutting down one of its blast furnaces at its Indiana Harbor Plant No. 4. This is a good thing. Due to the fact that Cleveland-Cliffs is using better quality inputs and other efficiencies, it will be able to produce the same amount of steel with one fewer blast furnace, reducing its operating footprint from eight furnaces to seven.
In conjunction with the announcement, Cliffs also said that due to strength in new orders, it would be raising prices for its carbon hot-rolled, cold-rolled, and coated steel products by at least $50 per ton.
These events enabled Cleveland-Cliffs to stay positive on the month as many stocks swooned. However, the stock then took off even more in the waning days of February as the Russia-Ukraine conflict emerged in earnest.
That could be because investors are worried that sanctions and conflict could curtail shipments of pig iron to U.S. steelmakers. Cleveland-Cliffs has invested in its own alternative capacity, with the construction of its hot-briquetted iron (HBI) plant in Ohio, which was completed in 2020. HBI is a substitute for pig iron in the steelmaking process. Competitor steel mills could have trouble meeting demand, which would benefit Cleveland-Cliffs. Still, it's early days, and the effect of the war on the industry is still unclear.
Image source: Getty Images.
Now what
Cleveland-Cliffs stock looks screamingly cheap right now, at just 4.4 times earnings. Thanks to a recent repricing of contracts, it should be able to generate strong earnings this year as well. Of course, investors should be aware that steelmaking is a highly cyclical industry, and we seem to be at or near a cycle top right now.
Cleveland-Cliffs and other steelmakers will perform based on the macroeconomic environment and their own capital allocation. On the bright side, Cliffs did just introduce a $1 billion share repurchase program, which is more than 8% of the company's market cap today.
