Cleveland-Cliffs, Beyond The EPS

Cleveland-Cliffs (CLF) is assessed as significantly undervalued, despite recent financial losses including a $708 million net loss in 2024, with an estimated upside potential exceeding 60%. This optimistic outlook is driven by favorable industry conditions, including increased Section 232 steel tariffs, the termination of a burdensome slab contract expected to boost EBITDA by $500 million annually, strategic asset idlings, and its position as the primary steel supplier to a revitalizing domestic automotive sector. The analysis projects CLF's earnings power at $828 million in net income, though risks such as prolonged asset idles and future competition from a potentially strengthened US Steel warrant consideration.

Analysis

Cleveland-Cliffs (CLF) is presented as a significantly undervalued steel producer, with analysis suggesting a potential valuation upside exceeding 60%. This bullish outlook persists despite severe recent financial headwinds, including a 70% decline in net income in 2023, a net loss of $708 million in 2024, and a subsequent $978 million loss in the first half of 2025, which caused a share price drop of nearly 75% from its 2024 peak. The recovery thesis is underpinned by several key factors: the recent increase of Section 232 steel tariffs to 50%, which has boosted Hot-Rolled Coil (HRC) prices; the termination of a burdensome slab contract with ArcelorMittal, expected to add approximately $500 million to annual EBITDA after December 2025; and strategic restructuring, including the idling of non-core assets to pay down debt. The acquisition of Stelco has expanded annual production capacity to 23 million tons. Based on these catalysts, the company's normalized earnings power is estimated at $828 million in net income, implying a forward P/E ratio of 6.2, a steep discount to the U.S. steel industry's forward P/E of 15.34. However, risks remain, including execution on cost-saving targets, reliance on a resurgent domestic auto industry, potential tariff reversals, and long-term competitive pressure from a technologically upgraded US Steel, though a recent explosion at a US Steel facility provides CLF with a short-term advantage.

Key Decisions for Investors

• Given the projected 60% valuation upside and a forward P/E of 6.2 versus the industry's 15.34, investors may consider the current price an attractive entry point, contingent on the materialization of the outlined catalysts.
• Monitor key de-risking events that underpin the earnings power calculation, particularly the successful termination of the ArcelorMittal slab contract after December 2025 and the stability of the 50% steel tariffs, which are critical for margin expansion.
• Investors should track management's execution on its restructuring plan, specifically the realization of the projected $300 million in savings from asset idles and the ability to secure buyers for the 1.5 million tons of freed-up steel capacity.
• While a competitor's plant explosion offers a near-term advantage, it is prudent to factor in the long-term competitive risk from a technologically enhanced US Steel under Nippon Steel's ownership, which could challenge CLF's market position.