Cleveland-Cliffs (NYSE: CLF) rallied and nearly closed at the $10 level after the company reported impressive Q2 results. Management beat analyst estimates on both earnings and revenue. The stock may finally say good-bye to the single digits.
Cleveland-Cliffs earned $0.76 a share, beating estimates by a wide margin of $0.24. Revenue rose 51.6 percent year-on-year to $714.3 million. With short float at 13.9%, the unexpected strength will give the short-squeeze plenty of momentum.
At this pace, look for CLF making $2 a share in 2019, which implies a 5x forward P/E. The consensus EPS estimate for next year is $1.29 or a 7.71 times forward P/E.
Looking ahead, investors may expect strong quarterly reports in the next few years. For 2018, management raised its outlook for sales, adding 500,000 long tons to its guidance.
The company will sell 21 million long tons this year, thanks to strong demand for pellets in the Great Lakes. It also mentioned free cash flow levels for this year that the company did not experience in years.
In the near-term, the short-squeeze, along with the potential for the tariff and trade war backing down could send the stock in to the low- to mid-double digits.
Takeaway
Higher-grade pellets benefit from higher demand compared to lower-quality products. That trend is not changing. The four years management spent investing in the business and shedding assets will now pay off.
