First, I posted here regularly under another username, but am attempting to not doxx myself as there's been a lot more traffic here the past few months.
Now, the main point: CLF's business is based on a cyclical commodity, in this case, steel. Cyclicals experience cycles (duh) in demand and pricing, which can drastically impact the earnings of companies that depend on them. Things like steel, rail, real-estate, airlines, etc. are all cyclical, with demand drastically ebbing and flowing over time. While share prices of the companies also can swing, those runs and dips are less drastic. Here is the key point: When the commodity prices/demand for whatever that cyclical company offers are dropping, earnings multiples rise. This is because the share price may have dipped some (or remained steady) but the earnings actually dropped. When the commodity prices/demand that a cyclical company depends on are rising, earnings multiples compress. This is because share price may have run some (or remained steady) but earnings have skyrocketed. If you work in the industry you'll typically figure out what mid-cycle earnings look like and apply a mid-cycle multiple to it if you're valuing it.
I saw a couple posts here yesterday that completely fucked this up. They were applying sky-high multiples (from when steel & CLF earnings were shitting the bed) to current projected earnings for the steel company, and using that to put out some smooth-brain-tier estimates as to what this should be valued at. So looking at forward multiples, for 2022, currently CLF is valued at a P/E of ~11.9x. Here is a screen-shot of some stats over the past 10 years.
The median is 8.62x (also note the average, which reflects ridiculous pops in ratio when steel, and thus CLF earnings, shit the bed). In other words, steel would have to increase even further from these ridiculous levels and projected 2022 earnings would have to increase by 40% to justify current valuations…oooooor the share price could retract. That doesn't sound too hot, right?
Well don't despair, because the data is muddy: For 2021 forward earnings (which incorporates the current run), we're at a 5.6x P/E right now, with a 10 year median of 7.1x. In other words, about a 20% increase in price based on these earnings would bring us in line, or steel prices would need to drop by quite a bit to get us closer to median P/E for the current year.
Conclusion: In other words, this isn't as clear-cut as some of those posts yesterday make it seem. If you believe that steel prices are going to remain near historical highs, then CLF is under-valued, by about 20% based on the past decade. But long-term support past this second half of this year is going to require another leg up past where steel prices are right now. Not trying to be a doomer, just realize that the 'CLF is different, it has a fundamental business behind it!' posts are not intellectually honest, and several of them are applying cycle-bottom multiples to current cycle-high commodity prices.
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