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Guilfoyle: The case for Cleveland-Cliffs

Steel maker's stock is recovering from lousy August and September.

Cleveland-Cliffs  (CLF) - Get Cleveland-Cliffs Inc Report, the flat-rolled steel producer, went through a rough month when shares fell 29% from August to September. Its future is now looking brighter as more growth is anticipated, argues Real Money’s Stephen “Sarge” Guilfoyle.

The company said on Oct. 11 it plans to buy Ferrous Processing and Trading, a large processor and distributor of ferrous scrap metal that focuses its operations in Ohio and Michigan. The acquisition’s enterprise value is nearly $775 million.

Ferrous Processing and Trading processes nearly 3 million tons of scrap annually and 50% of that is prime grade. The company produced about $100 million in EBITDA over the 12 months ended Aug. 31.

Cleveland-Cliffs CEO Lourenco Goncalves said that prime scrap will become more scarce in the future.

Another promising factor is that iron ore prices and rebar prices have been increasing in China.

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Investing in Cleveland-Cliffs could prove to be profitable, Guilfoyle wrote in a recent Real Money Pro column. “I think that CLF can meet all of its short to medium-term obligations, and that should be our (my) window as an investor,” he wrote.

In its late summer plunge, the stock also underperformed when compared to rival Nucor   (NUE) - Get Nucor Corporation Report , off 27.5%, the Dow Jones US Steel Index, off 24.7% and the broader Materials Select Sector SPDR ETF XLB off 9.5%.

“Sure, the Chinese engine is sputtering, at least partially due to shifting priorities in Beijing,” Guilfoyle wrote. “That said, demand for materials, ferrous and nonferrous metals alike only finds support should Congress get squared away and pass legislation around a larger spending package that hopefully includes a significant infrastructure build/rebuild.”

Analysts believe the company has more growth potential and the current consensus estimate is EPS of $2.23 in the current quarter, vs. a loss of $0.03 per share a year ago based on revenue of $5.69 billion. That would mean a revenue increase of 245%. Compared to the third quarter of 2019, pre-pandemic, revenue growth would be 925%!

The downside is that Cleveland-Cliffs has several hurdles -- its net cash position is declining, their debt load is “enormous” and free cash flow is negative, Guilfoyle wrote.

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