Shares of steel maker Cleveland-Cliffs witnessed an early surge on Friday following a recommendation from J.P. Morgan to buy the stock. On the other hand, United States Steel stock experienced a decline due to concerns about deal risk expressed by analyst Bill Peterson.
Cleveland-Cliffs Shows Promising Growth
Cleveland-Cliffs shares saw a 1% increase in premarket trading on Friday, while S&P 500 and Nasdaq Composite futures rose by approximately 0.3% and 0.4% respectively. This positive momentum signifies the confidence placed in the company.
Peterson promptly upgraded his rating on Cleveland-Cliffs to Buy after a brief restriction period. Analysts and brokerages occasionally halt ratings during significant acquisitions, such as Cleveland-Cliffs’ bid for U.S. Steel. It’s worth noting that Peterson’s previous rating for Cleveland-Cliffs was also Buy, and his price target remains unchanged at $24 per share.
Uncertainty Surrounding U.S. Steel
In contrast, U.S. Steel stock decreased by 0.8% as a result of investor concerns about the ongoing bid with Nippon Steel. Despite the December acceptance of an all-cash bid of $55 per share from Nippon Steel, U.S. Steel’s stock is currently trading well below the deal price at $46 per share in premarket trading on Friday.
This situation has led to scrutiny from politicians who question the feasibility of a non-U.S. entity acquiring an entity named U.S. Steel. The uncertainties surrounding this deal have contributed to apprehension among investors, with fears of potential regulatory intervention.
Peterson’s Take on U.S. Steel
Bill Peterson also shared his insights on U.S. Steel, reinstating a rating of Hold with a price target of $47. The burden of regulatory concerns weighs heavily on his analysis.
Conclusion
While Cleveland-Cliffs experiences positive growth and garners the attention of investors motivated by J.P. Morgan’s endorsement, U.S. Steel faces uncertainties in their bid with Nippon Steel. The ongoing concerns revolving around the acquisition weigh heavily on the outlook for U.S. Steel stock.
U.S. Steel and Nippon: A Disparate Partnership
U.S. Steel, with its mere $10 billion market cap, makes for a rather odd pairing with Nippon, especially when considering the latter’s robust capital and technological resources. Although Nippon’s acquisition doesn’t impact U.S. Steel’s domestic market share in the steel industry, it does raise eyebrows.
Uncertainty Looms Over U.S. Steel’s Future
If the proposed deal fails to materialize, financial analyst Peterson predicts that U.S. Steel’s stock may plummet to around $40. It’s worth noting that prior to potential buyers’ interest in the company during the summer of 2023, shares were trading in the mid-$20s range.
Cliffs on a Positive Trajectory
On the other hand, Cliffs, a separate entity, is poised for a promising future according to Peterson’s revised rating. He believes that Cliffs will witness a considerable influx of cash in 2024 and the ensuing years as cost pressures ease and capital expenditure requirements remain minimal. Consequently, shareholders can expect increased cash returns and debt reduction.
Wall Street Expects Steady Cash Flow for Cliffs
Analysts on Wall Street project that Cliffs will generate an average of $1.4 billion in free cash flow per year over the next three years. This expectation is supported by Cliffs’ solid track record of delivering approximately $1.7 billion in annual free cash flow over the past three years. Considering its market capitalization of approximately $10 billion, shares of Cliffs are currently trading at roughly seven times its free cash flow.
Cliffs Garners Investor Confidence
Interestingly, Peterson holds a more bullish stance on Cliffs’ stock compared to his counterparts. While the average analyst price target for Cliffs is $20 per share, approximately 42% of analysts rate the stock as a Buy. It’s worth noting that the average Buy-rating ratio for S&P 500 stocks stands at around 55%.
U.S. Steel Struggles to Gain Support
In contrast, U.S. Steel stock fails to garner similar recommendations. The average analyst target price for U.S. Steel is approximately $42 per share, and a mere 10% of analysts rate the stock as a Buy. It appears that many are cautious about endorsing U.S. Steel while the uncertainties surrounding the potential deal persist.
