Cleveland-Cliffs Rallies After Announcing Scrap Metal Acquisition

Cleveland-Cliffs (NYSE: CLF) has been etching a correction since mid-August. It's still working on that base, but shares gapped up 4.02% Monday after North America's biggest steel producer said it would acquire metal recycler Ferrous Processing and Trading in a deal valued at $775 million.

Cleveland-Cliffs has grown revenue at double- or triple-digit rates throughout the pandemic. Earnings growth also exploded in the past two quarters.

There's good reason for the growth: As the nation's biggest iron-ore pellet maker, Cleveland-Cliffs has an advantage when it comes to vertical integration in the steelmaking process. Controlling more of its own processes can help manage the worldwide problems of soaring input costs and supply-chain backlogs.

The acquisition of a scrap metal company fits into that vertical integration, as scrap containing iron is an ingredient in the steelmaking recipe.

Ferrous Processing and Trading accounts for around 15% of the domestic prime scrap market, according to the Cleveland-Cliffs press release announcing the deal.

Automotive Industry Strength

"FPT operates 22 scrap processing facilities, with approximately 90% of revenues originating from its Midwest locations, primarily in Michigan and Ohio," said Cleveland-Cliffs. "In the trailing twelve months ended August 31, 2021, FPT generated EBITDA of approximately $100 million. FPT already enjoys an outsized position in automotive and industrial scrap, which is expected to grow as part of Cleveland-Cliffs."

On September 20, the stock cratered 9.65% in almost double average trading volume in tandem with a broad market selloff, driven by concerns about China. Since then, worries about the default of Chinese property developer Evergrande have receded, at least for now.

As the broader market has trouble getting any upside traction, Cleveland-Cliffs twice tested its 200-day line, and twice found support.

The stock is up 4.67% in the past week, bucking a trend of declining returns over the past three months. Despite currently forming a base, shares are up 49.24% year-to-date and 190.12% in the past year.

MarketBeat analyst data show that analysts have a "buy" rating on the stock, with a $25.56 price target, an upside of 18.47%.

Since April 26, nine analysts either boosted their price target, upgraded their ratings or initiated coverage on Cleveland-Cliffs with a positive rating.

For the quarter, analysts' consensus estimate calls for earnings of $2.21 per share on revenue of $5.66 billion.

According to MarketBeat earnings data, the company missed analysts' views in each of the past three quarters. That's despite rebounding from a year-earlier loss in the most recent quarter.

This year, Wall Street sees earnings coming in at $6.10 per share, up an almost incredible 1,000% from a year ago.

Cleveland-Cliffs has a market cap of $10.75 billion. It's tracked in the S&P 400 mid-cap index.

Potential For Infrastructure?

Despite any commodity-related headwinds, there's reason to be optimistic about the potential for steel production. If the predicted increase in infrastructure spending unfolds as hoped, steelmakers such as Cleveland-Cliffs stand to benefit.

The current consolidation appears very healthy, especially given the repeated 200-day support. With the market volatility lately, the stock wasn't able to make progress after clearing a second-stage base in July. The low point of this current base did not, as of yet, undercut the previous structure low, so the base count has not been reset; the stock is making its third attempt at a second-stage base.

The company reports its third-quarter on October 22. As always with an earnings report, there's potential for the stock to move sharply in one direction or another. It's worth the reminder: Even if a company reports better-than-expected revenue or earnings, a forward-looking statement or comment buried deep in the press release could send the stock lower.

At this time, the buy point would be a price slightly above the August 13 high of $26.51. It's entirely possible that over the coming weeks, the stock could form another type of base, such as a double bottom or cup with handle, meaning a lower buy point may present itself.