Tuesday, Wolfe Research adjusted its stance on shares of Cleveland-Cliffs Inc. (NYSE:CLF), moving the rating to Underperform from Peer Perform. The firm also set a price target of $18.00 for the company's stock. The revision follows a notable increase in the company's share price over the last two months, which saw a spike of 16%, even as earnings estimates declined and sheet prices showed a downward trend.
Wolfe Research based its new price target on a 7x multiple of the company's estimated 2024 enterprise value to EBITDA (EV/EBITDA) and an 8x multiple for 2025, applying below-consensus estimates. This adjustment comes in light of the stock's recent trading at 7.5x, which is higher than its historical average of 5.2x over the past three years. Despite Cleveland-Cliffs' strong free cash flow profile, Wolfe Research expresses caution, anticipating that share buybacks may be restricted due to the company's interest in pursuing further mergers and acquisitions.
The firm also cited increasing competition in the automotive sheet market as a factor in the downgrade, with mini-mills and aluminum representing growing threats. Additionally, the analyst pointed to the need for significant capital expenditures for the relining of blast furnaces, an essential maintenance requirement, as a potential financial burden for Cleveland-Cliffs.
The report suggests that these combined factors of a high trading multiple, potential limitations on capital returns to shareholders, and increased competition and capital needs, contribute to the less optimistic outlook for Cleveland-Cliffs' stock performance. The company has not issued any public response to the downgrade at this time.
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