Cleveland-Cliffs Reports: Here’s How I’ll Trade It

Cleveland-Cliffs (CLF) released the firm’s fourth quarter financial results early on Friday morning. The results were much, much better than the year ago, comparable period. Just not what Wall Street expected.

The company posted adjusted EPS of $1.78 (GAAP EPS: $1.69). That compares to $0.24 for Q4 2020, but fell about a quarter of a dollar short of expectations. The firm also generated $5.35B in revenue over the three month period. That was good enough for year over year growth of 136.7%. That also fell about $300M short of what Wall Street had in mind. The stock sold off overnight.

For the full year, Cleveland-Cliffs set annual records for revenue ($20.4B), net income ($3B), adjusted EBITDA ($5.3B), and operating cash flow ($2.8B). What have you done for me lately? Fourth quarter adjusted EBITDA was $1.5B, up from $286M a year ago. The firm also acquired the Ferrous Processing and Trading Company, paid down about $150M in principal debt, and reduced the firm’s pension liabilities, net of assets by about a cool $1B.

I addition, the firm’s board has authorized a new share repurchase authorization permitting but not committing the firm to acquire up to $1B worth of outstanding common shares.

Steelmaking

The firm sold 3,384 net tons of steel products in Q4 2021, up from 1,858 net tons in Q4 2020. Cost of goods increased from $1.867B to $3.907B, as the average selling price increased from $880 per net ton, to $1,423. For the year, the average selling price increased from $947 in 2020 to $1,187 in 2021.

This may be, on top of missing estimates, why the stock is under some pressure. From the press conference… “Due to the successful renewal of relevant fixed price sales contracts, an based on the current 2022 futures curve which implies an average hot-rolled coil steel index price of $925 per net ton for the remainder of the year, the Company would expect it’s 2022 average selling price to be approximately $1.225 per ton.” While this selling price would be up nicely over 2021, it would also be down sharply from Q4 2021.

Balance Sheet

The balance sheet is not in bad shape overall. It’s not perfect, but it is manageable. The net cash position is tiny, down to $48M from $112M a year earlier. I know, the firm has been putting a lot of cash to work and has used cash to manage existing liabilities. That’s why they are going to get a hall pass from me on this one. It’s not a balance sheet item but Cleveland-Cliffs does have access to about $2.5B under an ABL credit facility should the doors fall off.

All that said, current assets have grown over the past year to $7.653B in the form of accounts receivable and inventories. This dwarfs current liabilities that have grown more slowly and only because of growth in accounts payable. Total assets of $18.975 easily top total liabilities less equity of $13.201B. More work needs to be done reducing long-term debt, which still stands at $5.238B.

The Chart

To be honest, I have traded CLF in the past and the name has been good to me. I actually entered into the task of writing this article with personal bias. I expected to convince myself to buy this dip. The chart has kind of talked me out of that. Interestingly the shares formed a double top reversal where the two peaks, August and October, topped out at the same spot… to the penny ($26.51).

From there, the shares have formed a downward slope that appears to be fitting nicely into one of my Pitchfork models. Yes, I see the Full Stochastics Oscillator. Neither Relative Strength nor the daily MACD tell that cautionary tale. That said, CLF did try and fail to break out of the upper chamber of the Pitchfork going into earnings. The upper trendline intersects right here with CLF’s 200-day SMA. That should make for some serious resistance.

From an equity perspective, I would rather buy this name on momentum above the 200-day line than right here. There is no dividend, so nothing to miss out on by being patient. I am thinking that the April $18 puts trading for about $1.05 and the April $15 puts that are going for about $0.35 look ripe for a sale that would expose the investor to highly discounted equity risk for a price rather than plain old equity risk.