The stock of Cleveland-Cliffs (NYSE:CLF, 30-year Financials) shows every sign of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $20.94 per share and the market cap of $10.5 billion, Cleveland-Cliffs stock is believed to be possible value trap. GF Value for Cleveland-Cliffs is shown in the chart below.
The reason we think that Cleveland-Cliffs stock might be a value trap is because its Piotroski F-score is only 2, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here. Furthermore, Cleveland-Cliffs has an Altman Z-score of 0.98, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Cleveland-Cliffs has a cash-to-debt ratio of 0.02, which is in the bottom 10% of the companies in Steel industry. GuruFocus ranks the overall financial strength of Cleveland-Cliffs at 3 out of 10, which indicates that the financial strength of Cleveland-Cliffs is poor. This is the debt and cash of Cleveland-Cliffs over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Cleveland-Cliffs has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $9 billion and loss of $0.12 a share. Its operating margin is 1.93%, which ranks worse than 66% of the companies in Steel industry. Overall, the profitability of Cleveland-Cliffs is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Cleveland-Cliffs over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Cleveland-Cliffs is 30.4%, which ranks better than 96% of the companies in Steel industry. The 3-year average EBITDA growth rate is -5.5%, which ranks in the middle range of the companies in Steel industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Cleveland-Cliffs’s ROIC is -1.54 while its WACC came in at 12.01. The historical ROIC vs WACC comparison of Cleveland-Cliffs is shown below:
To conclude, The stock of Cleveland-Cliffs (NYSE:CLF, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Steel industry. To learn more about Cleveland-Cliffs stock, you can check out its 30-year Financials here.
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