Steel producers from various countries benefited substantially in 2021 owing to the heightened demand for steel from rebounding industrial and construction activities and its high prices worldwide. The price hike was caused by a production cut by major steel producer and exporter China, in an effort to reduce its carbon emissions. Moreover, the ongoing war between Russia and Ukraine – two significant exporters of iron ore and steel products – has been raising concerns about the global steel supply and surged prices further lately.

As a result, domestic steel companies are expected to witness heightened demand. Moreover, the passage of the bipartisan infrastructure bill, which provides significant funding to improve America’s infrastructure, and the easing of tariffs on steel imports from the EU and Japan, should drive the industry’s growth. Investors’ interest in this space is evident from the VanEck Vectors Steel ETF’s (SLX) 6% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The steel market is expected to grow at a 3.5% CAGR to reach $1.43 trillion by 2028. Therefore, Cleveland-Cliffs Inc. (CLF) and United States Steel Corporation (X) should benefit.

CLF and X are two leading producers of steel and steel products in the United States. CLF is vertically integrated from mined raw materials and direct reduced iron to primary steelmaking and downstream finishing, stamping, tooling, and tubing. It offers flat-rolled steel products, custom-made pellets, and hot briquetted iron (HBI). X is an integrated steel producer that sells steel products, including flat-rolled and tubular products, railroad services, and real estate operations, primarily in North America and Europe. It serves automotive, construction, consumer, electrical, industrial equipment, and service 

CLF is up 26% in 2022 and X is up 40%.  Which of these stocks is a better pick now? 

Latest Developments

On November 18, 2021, CLF completed the acquisition of Ferrous Processing and Trading Company (FPT), one of North America’s premier processors, buyers, sellers, and recyclers of scrap metals of all kinds, and will operate as CLF’s wholly-owned subsidiary going forward. This acquisition will enable CLF to grow its presence in the scrap business.

On February 28, 2022, X announced a $60 million investment made to advance its metallics strategy by insourcing pig iron capabilities at its Gary Works steel mills. Expecting to produce up to 500,000 tons of pig iron annually, this investment marks X’s first step to translating its low-cost iron ore advantage to its electric arc furnaces (EAF) footprint while driving efficiencies at Gary Works. Once complete, the Gary pig iron production would provide nearly 50% of Big River Steel’s other ore-based metallics needs, contribute over $30 million of run-rate enterprise EBITDA benefits and deliver more than 30% internal rate of return.

Recent Financial Results

CLF’s revenues for its fiscal 2021 fourth quarter ended December 31, 2021, increased 137% year-over-year to $6.27 billion. The company’s operating income came in at $1.12 billion, up 945.8% from the prior-year period. While its net income increased 1295.3% year-over-year to $893 million, its non-GAAP EPS grew 1107.1% to $1.69. As of December 31, 2021, the company had $48 million in cash and cash equivalents.

For its fiscal 2021 fourth quarter ended December 31, 2021, X’s net sales increased 119.4% year-over-year to $5.62 billion. The company’s pre-tax income came in at $1.02 billion, versus a $45 million loss in the year-ago period. X’s adjusted net income came in at $1.04 billion, compared to a loss of $60 million in the prior-year period. Its adjusted EPS came in at $3.64, versus a $0.27 loss per share in the prior-year period. The company had $2.52 billion in cash and cash equivalents as of December 31, 2021.

Past and Expected Financial Performance

CLF’s net income and EPS have increased at CAGRs of 38.4% and 16.1%, respectively, over the past three years.

CLF’s EPS is expected to grow 2285.7% year-over-year in the fiscal 2022 first quarter, ending March 31, 2022. Its revenue is expected to grow 33.2% year-over-year in the same quarter. Analysts expect the company’s EPS to grow at a 27.4% rate per annum over the next five years.

In comparison, X’s net income and EPS have increased at CAGRs of 55.3% and 33.5%, respectively, over the past three years.

Analysts expect X’s EPS to rise 234.3% year-over-year in its fiscal year 2022, ending March 31, 2022. Its revenue is expected to increase 47.4% year-over-year in the same quarter. The company’s EPS is expected to grow at an 8% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, CLF is currently trading at 4.75x, 53.7% higher than X’s 3.09x. In terms of forward EV/EBITDA, X’s 2.17x compares with CLF’s 4.62x.

Profitability

CLF’s 20.44 billion trailing-12-month revenue is marginally higher than X’s 20.27 billion. However, X is more profitable, with a 28.7% gross profit margin versus CLF’s 22.2%.

Furthermore, X’s net income margin and levered free cash flow margin of 20.6% and 9% compare with CLF’s 14.6% and 3.8%, respectively.

POWR Ratings

While X has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CLF has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both CLF and X have a B grade for Momentum, reflecting their impressive price gains over the past year. CLF delivered 58.3% returns over this period, while X has gained 48.8%.

X has an A grade for Value, consistent with their lower-than-industry valuation ratios. X’s 0.91x trailing-12-month Price/Book is 59.2% lower than the 2.23x industry average. CLF’s C grade for Value is in sync with its slightly higher-than-industry profit margins. CLF’s 2.25x trailing-12-month Price/Book is 1.2% higher than the industry average of 2.23x.

Of the 33 stocks in the A-rated Steel industry, CLF is ranked #27, while X is ranked #16.

Beyond what we have stated above, our POWR Ratings system has also rated CLF and X for Stability, Sentiment, Quality, and Growth. Get all CLF ratings here. Also, click here to see the additional POWR Ratings for X.

The Winner

Soaring demand amid supply disruptions should hugely benefit both CLF and X in the coming months. However, a higher profit margin and lower valuation should allow X to perform better than CLF.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Steel industry.

CLF shares rose $0.04 (+0.15%) in after-hours trading Thursday. Year-to-date, CLF has gained 21.45%, versus a -10.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

More Resources for the Stocks in this Article