Vale S.A. (VALE) and Cleveland-Cliffs Inc. (CLF) are two leading producers of raw materials in the steel industry. U.S.-based VALE’s ferrous minerals segment produces and extracts iron ore, coal and other ferrous products, which are used in the production of steel. Brazil-based CLF’s Steel and Manufacturing segment includes subsidiaries that offer carbon and stainless-steel tubing products, tool design and build, and complex assemblies.
While the industry suffered falling steel prices in early 2020 due to the COVID-19 cessation of industrial activities, steel prices have rebounded. This was due mainly to an increase in demand for steel in industrial and manufacturing activities after the economy reopened. The VanEck Vectors Steel ETF’s (SLX) has returned 163.1% over the past year, compared to S&P 500’s 49.5% gains over this period.
President Biden’s proposed spending to encourage the electrification of vehicles and reshaping America’s infrastructure is likely to benefit the steel industry over the next few years. Indeed, the global IF Steel market size is expected to grow at a CAGR of 5.3% over the next four years and reach $61.48 billion by 2025.
VALE has returned 16.5% so far this year versus CLF’s 23.6% gains. In terms of the past year’s performance, CLF is a clear winner with 409.6% returns versus VALE’s 140.2%. But which of these two stocks is a better pick now? Let’s find out.
On April 13, VALE priced an offering of VALE’s 214.33 million debentures at R$53.50, totaling R$11.47 billion.
VALE plans to conduct a share buyback of 2.70 million common shares and their respective ADRs over the next 12 months. The program demonstrates its management’s confidence in Vale’s potential to consistently create share value.
Last month, VALE sold its New Caledonia nickel mining assets to a consortium that included commodity trader Trafigura. The divestment will allow operations to continue and will give VALE the right to a portion of its output.
And in an announcement dated March 22, VALE plans to increase its iron ore production to 400mtpy by the end of 2022. Its production was disrupted due to the 2019 Brumadinho dam disaster. Based on 2020 iron ore prices, a full production capacity of 400mtpy would imply a 33% upside in the stock from its current price.
Note that VALE is one of the current stocks in Jaimini Desai’s POWR Growth portfolio. Learn more here.
CLF signed a tentative agreement with the United Steelworkers (USW) on April 12, 2021 for a new 53-month labor contract. The new contract will hire approximately 300 USW-represented workers at Mansfield Works steel mill.
In February, CLF priced $500 million of senior unsecured guaranteed notes due 2029 and due 2031. in an offering on February 9. The company intends to use the proceeds to redeem all its outstanding senior unsecured notes due 2024 and 2025 and senior notes due 2021, 2023 and 2025, It will also reduce borrowings under its existing asset-based revolving credit facility.
In January, CLF set a target to reduce its greenhouse gas emissions by 25% by 2030. This goal represents its combined direct and indirect greenhouse gas emission reductions on a mass basis compared with 2017 baseline levels.
Recent Financial Results
VALE is scheduled to release its fiscal 2021 first quarter financial results on April 19 after the market closes. VALE’s net operating revenue for the fourth quarter, ended December 31, 2020, was $14.7 billion, representing an improvement of 48.2% year-over-year. Its net operating revenue from Asia increased 62.6% year-over-year to $11.11 billion. Its net operating revenue from the ferrous minerals and base metals segment has increased 52.2% year-over-year and 44.1% year-over-year, respectively. And its net income was $739 million compared to a net loss of $1.56 billion for the fourth quarter of 2019. The company had cash and cash equivalents of $13.49 billion as of December 31, 2020, representing a rise of 83.5% year-over-year.
CLF is scheduled to release its fiscal 2021 first quarter financial results on April 22, 2021 before the market opens. CLF’s revenues of $2.26 billion for the fiscal 2020 fourth quarter, ended December 31, 2020, represents a 322.5% year-over-year rise. The company’s operating income has increased 32.1% year-over-year to $107 million. Its net income came in at $64 million for the quarter, representing 1.6% increase from the prior-year period. Its EPS has decreased 39.1% year-over-year to $0.14. The company had cash and cash equivalents of $112 million as of December 31, 2020, representing a fall by 68.3% year-over-year.
Past and Expected Financial Performance
VALE’s EBITDA and revenue increased at CAGRs of 33.6% and 24.3%, respectively, over the past three years. Its EBIT and total assets also increased at CAGRs of 39.7% and 13.4%, respectively, over the same period.
Analysts expect VALE’s revenue to increase 90.2% in the current quarter ending June 30, 2021, 30.1% in fiscal 2021 and decline by 9.8% in fiscal 2022. VALE’s EPS is expected to increase 378.3% in the current quarter, 285% in the current fiscal 2021 but decline by 23.3% in the next fiscal 2022. Its EPS is expected to increase at a rate of 34% over the next five years.
In comparison, CLF’s EBITDA and revenue increased at CAGRs of 3.8% and 169.1%, respectively, over the past three years. Its total assets also increased at a CAGR of 78.4%, but its EBIT declined by 16.5% over the same period.
CLF’s revenue is expected to increase 360.3% in the current quarter ending June 30, 2021, 263.3% in the current fiscal 2021 and decline by 10.1% in fiscal 2022. Its EPS is expected to increase 532.1% in the current quarter, 782.6% in fiscal 2021 but decline by 54.1% in fiscal 2022. CLF’s EPS is expected to grow at a rate of 27.4% over the next five years.
VALE’s trailing-12-month revenue is 7.5 times CLF’s. VALE is also more profitable with a gross profit margin of 52.7% versus CLF’s 8.9%.
However, VALE’s ROE compares favorably with CLF’s negative value. And VALE’s ROA of 14.4% looks profitable over CLF’s 1.4%. VALE’s $14.48 billion of cash from operations compares favorably with CLF’s negative value.
In terms of forward non-GAAP P/E, CLF is currently trading at 11.17x, 86.5% higher than VALE, which is currently trading at 5.99x. Also, CLF is more expensive in terms of trailing-12-month EV/EBITDA, CLF’s 29.74x is 520.9% higher than VALE’s 4.79x.
In terms of trailing-12-month price-to-book, CLF’s 4.26x is significantly higher than VALE’s 2.79x.
So, VALE is the more affordable stock.
VALE has an A overall rating, which equates to Strong Buy in our proprietary POWR Ratings system. However, CLF has an overall rating of D which represents a Sell.
Both VALE and CLF have a Momentum Grade of B due to their impressive price gains over the past year. However, in terms of Quality Grade, VALE has been graded an A, which is consistent with its significantly higher-than-industry profitability ratios. In comparison, CLF has a Quality Grade of D because of its negative ROE and cash from operations values.
CLF has a C grade for Value, which is consistent with its higher-than-industry forward non-GAAP price/earnings ratio. However, VALE has a B grade for Value, given its marginally higher valuation with respect to its peers.
Of 61 stocks in the Industrial – Metals industry, VALE is ranked #4, while CLF is ranked #29.
In addition to the POWR Ratings grades I’ve just highlighted both VALE and CLF are also rated for Growth, Stability, and Sentiment. Click here to see the additional ratings for CLF. Also, get all VALE ratings here.
While both VALE and CLF are established players in the steel industry, VALE seems to be a better buy based on its higher earnings growth potential and discounted valuation.
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 Industrial – Metals industry.
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VALE shares rose $0.03 (+0.15%) in after-hours trading Monday. Year-to-date, VALE has gained 21.02%, versus a 11.42% 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...
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