Barron's notes unusual downgrade from Buy to Sell at GLJ Research with $13.44 target
8:31 am ET July 27, 2022 (Dow Jones)
by Al Root
Things are going to get rocker for steel producers in the second half of 2022, according to one analyst. He issued a double downgrade on Cleveland-Cliffs stock, sending the shares lower in early trading.
Wednesday, GLJ Research analyst Gordon Johnson cut his rating on Cleveland-Cliffs (ticker: CLF) stock to Sell from Buy, skipping a Hold rating. It is typical for analysts to upgrade or downgrade stocks one notch at a time.
His price target went to $13.44 a share from $36.06, for a cut of more than 60%. The shares were off about 1% in early trading, while futures on the S&P 500 and Dow Jones Industrial Average gained 0.9% and 0.4%, respectively.
Johnson believes that forecasts for Cliffs' third-quarter earnings should be lower. The Wall Street consensus call for earnings before interest, taxes, depreciation, and amortization has already come down to about $1 billion from $1.3 billion, but Johnson expects about $820 million in third-quarter Ebitda.
Right now, Cliffs' enterprise value -- essentially the value of a company's stock and debt outstanding -- is roughly 2.8 times estimated Ebitda. Using Johnson's estimates, enterprise value is roughly three times.
That is too expensive for him. United States Steel (X), for comparison, trades at an enterprise value of about 1.4 times Ebitda.
The S&P 500 trades for roughly 12 times. Steel businesses get very low multiples, relative to the market, but steel is a mature, volatile commodity industry.
With the downgrade, about 55% of analysts covering Cliffs shares rate them Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 58%. The average analyst price target for Cliffs shares is about $25, roughly 50% higher than recent levels.
Coming into Wednesday trading, Cliffs stock is down about 25% year to date, while the S&P 500 and Dow Jones Industrial Average have dropped about 18% and 13%, respectively.
Cliffs shares have slid along with steel prices. Prices for hot-rolled coil, a benchmark product, are at about $850 a ton, down roughly 40% so far this year.