Investors Aren't Buying Outlook Offered By Cleveland-Cliffs CEO

On Monday morning, steelmaker Cleveland-Cliffs (CLF) released the firm's first quarter financial results.

For the period ended March 31, Cleveland-Cliffs posted an adjusted EPS of -$0.40 (GAAP EPS: -$0.42) on revenue of $4.9 billion. These top- and bottom-line numbers all modestly beat Wall Street's expectations, while that top-line print was good enough for year-over-year growth of 6.3%.

Chairman, president and CEO Lourenco Goncalves commented on the quarter:

“Q1 results reflected the impact of short-term headwinds like energy prices and price realization lags. As we move through the year, each quarter is expected to improve sequentially, as the momentum already visible in both our order book and pricing continues to translate into earnings and cash flow. Importantly, we expect to generate healthy positive free cash flow in the second quarter, marking a return to the earnings and cash-generation profile this company is capable of delivering."

Operations

As revenue generation expanded 6.3%, the cost of those sales and other operating expenses increased 10.6% to $5.1.35 billion. This left the firm's GAAP operating income/loss at $213 million, up from -$331 million.

After accounting for interest, other income and expenses, and taxes, GAAP net income grew slightly from -$243 million to -$237 million. This works out to a GAAP EPS of -$0.42, up small from -$0.44 for the year-ago comparison. To get to the adjusted -$0.40, minor adjustments were made for currency exchange rates and changes in the fair value of derivatives (hedges) held.

Guidance

For the full year, CLF sees steel shipments of 16.5 million tons to 17 million tons and capex spending of about $700 million. This guidance, if vague, is a reaffirmation of guidance that had been previously issued and did little to reassure investors.

The stock is selling off in response to both the Q1 results and this forward-looking outlook. The CEO, in his comment above, did state that he expects to see positive free cash flow during the current quarter. It does not feel on Monday morning like investors are buying into that as reality.

Fundamentals

For the period reported, CLF generated an operating cash flow of -$325 million. On top of that, the firm spent $152 million on capital expenditures bringing "free" cash flow to -$477 million. The firm is obviously in no position to return capital to shareholders.

Turning to the balance sheet, the firm ended the quarter with a cash position of $45 million, inventories of $4.591 billion and current assets of $6.71 billion. Current liabilities add up to $3.323 billion. This leaves the firm's current ratio at a healthy looking 2.02. However, once inventories are removed from the equation, the firm's quick ratio stands at an absolutely pathetic 0.64.

Total assets amount to $20.115 billion, of which just 14.4% is labeled as either good will or other intangibles. This is perfectly acceptable. Total liabilities less equity comes to $14.096 billion. Of that, $7.763 billion is labeled as long-term debt, which is absolutely terrifying when balanced against a cash position of $45 million and accounts receivable of $1.882 billion. Safe to say that I am no fan of this balance sheet. Negative cash flows just exacerbate the problems.

Opinion

There really is not much to like here. The firm has not been profitable in a dog's age. Cash flows are negative. The balance sheet stinks. The guidance does nothing to inspire confidence. It really is no wonder that investors are lining up on Monday morning to exit the stock.

Readers will see that the chart had been improving until Monday morning.

The stock peaked on Friday at the approximate spot where the 50-day SMA ran into the 23.6% Fibonacci retracement level of the October through March sell-off. Technically, hanging on to the 21-day EMA on Monday is crucial for the bulls if there are any left. Retaking the 50-day line could send the stock as high as the 200-day SMA (currently $11.40) for speculators.

That's the best-case scenario that I see for this stock at the moment. Neither the daily MACD nor relative strength are either all good or all bad. There are mixed messages in the indicators.

If I Wanted...

...to speculate on the long side of CLF, I would rather go out to July 17 expiration and sell $10 puts for $1.40 a contract than buy the equity.

If the shares take off, $1.40 is a nice payday. If the shares get hit hard and the trader ends up eating the stock, an $8.60 net basis is a whole lot better than paying $9.30 for the stock on Monday.

At the time of publication, Guilfoyle had no positions in any securities mentioned.