Why Cleveland-Cliffs Plunged on Tuesday

Earnings disappointed, but looking under the hood, the sell-off could be an opportunity.

Shares of steelmaker Cleveland-Cliffs (CLF -10.00%) were falling hard in Tuesday trading, down 9.7% as of 2:10 p.m. ET.

Investors apparently took exception with Cliffs missing on revenues and earnings per share in its first-quarter results, which were reported last night. However, the miss appears to be due to an unusual issue with one of Cliffs’ customer segments, which appears to have been resolved at the end of the quarter. With the company ramping up share repurchases, investors may want to investigate buying the dip.

A headline miss, but much going on under the hood

At first glance, first-quarter earnings weren’t great. Revenue of $5.2 billion came in $130 million short of analyst estimates, and the $0.18 in adjusted (non-GAAP [generally accepted accounting principles]) earnings per share came in $0.04 short.

Looking at the different components of the company’s total, management noted strong, healthy demand and sales to automotive customers, which made up 32% of revenue. However, management noted service center customers went on a “buyer’s strike” in anticipation of price declines in the first quarter. The company also noted it would be exiting the loss-making tin plate business due to foreign producers dumping product in the U.S. That resulted in the company shutting down its Weirton plant.

Also affecting higher costs, but what could potentially be seen as a positive, were higher-than-expected interest costs, as Cleveland-Cliffs ramped up share repurchases but increased the company’s debt to do so.

With the proposed acquisition of U.S. Steel (X -2.29%) apparently off the table for the near term, management is now aggressively turning to repurchasing stock. In the first quarter, the company retired 6% of its shares, a huge amount for a single quarter. Furthermore, the company’s board approved a new $1.5 billion share repurchase program.

Looking ahead

While the first-quarter miss was unpleasant, CEO Lourenco Goncalves noted in the press release, “orders from our service center customers have started to increase, with spot pricing also on the upswing.” That potentially bodes well for results for the rest of the year as long as demand and pricing hold up.

Meanwhile, at today’s reduced stock price, a $1.5 billion share repurchase could retire another 17% of shares outstanding. Value investors and those bullish on steel demand for autos and infrastructure may, therefore, wish to dig into Cleveland Cliffs after the earnings-driven dip.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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