On Thursday, Cleveland-Cliffs (NYSE:CLF) experienced a shift in its stock rating as Morgan Stanley (NYSE:MS) adjusted its stance on the company from Overweight to Equalweight. The firm also revised its price target for the company to $20.00, a decrease from the previous target of $21.50.
Morgan Stanley's decision to downgrade Cleveland-Cliffs' stock comes with an acknowledgment of the company's anticipated strong free cash flow (FCF) yield in the upcoming years, attributed to a lack of major capital expenditure projects. Additionally, Cleveland-Cliffs is expected to maintain stable overall realized pricing due to a significant portion of its annual price contracts being fixed, even though spot steel prices are forecasted to decline in 2024.
Despite these positive factors, Cleveland-Cliffs' significant exposure to the automotive sector is a concern for Morgan Stanley. The sector is predicted to underperform this year, following a robust 2023. This exposure is particularly notable as detailed in Exhibit 9 of the firm's coverage, which highlights Cleveland-Cliffs' position within the North American steel industry.
The downgrade also reflects the stock's recent performance, with a roughly 23% increase since the beginning of the fourth quarter of 2023. This surge was driven by a series of successful price hikes and announcements from management focusing on share buybacks. However, Morgan Stanley now believes that the upside potential to their new price target is limited, leading to the adjustment to an Equalweight rating.
InvestingPro Insights
The recent change in stock rating for Cleveland-Cliffs by Morgan Stanley has brought attention to the company's financial health and market performance. In light of this, certain metrics from InvestingPro provide a clearer picture of the company's standing. The market capitalization for Cleveland-Cliffs stands at $9.73 billion, reflecting the company's substantial size within the Metals & Mining industry. A key metric to consider is the P/E Ratio, which is currently at 21.59 when adjusted for the last twelve months as of Q4 2023. This indicates the amount investors are willing to pay per dollar of earnings, which is a significant factor in Morgan Stanley's evaluation.
InvestingPro Tips suggest that Cleveland-Cliffs has been actively engaging in share buybacks, a move that often signals management's confidence in the company's future performance. Additionally, the company is expected to have a high shareholder yield, which could be attractive to investors seeking returns. While the company does not pay a dividend, the strong free cash flow yield implied by its valuation may compensate investors in other ways.
Regarding Cleveland-Cliffs' performance, the company has experienced a large price uptick over the last six months, with a total return of 25.51%. This aligns with Morgan Stanley's observation of the stock's significant increase since the beginning of Q4 2023. However, it's important to note that the stock's price is at 85.55% of its 52-week high, suggesting that there might be limited room for upward movement, hence the adjustment to an Equalweight rating.
For those interested in further insights and metrics on Cleveland-Cliffs, InvestingPro offers additional tips, including the company's expected net income growth this year and its position as a prominent player in its industry. To explore these insights in detail, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro. There are 11 additional tips listed on InvestingPro that could provide further guidance on the company's prospects.
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