Why Cleveland-Cliffs Rallied Today

Key Points

• Cleveland-Cliffs beat revenue and earnings expectations.

• Its CEO sounded optimistic on the prospect for tariff-related benefits.

• However, those benefits have yet to come through in a material way.

• 10 stocks we like better than Cleveland-Cliffs ›

Shares of Cleveland-Cliffs (NYSE: CLF) rallied 5.6% on Tuesday as of 2:26 p.m. ET.

The U.S.-based steelmaker reported second-quarter earnings today, and while revenue and earnings were down relative to last year, both metrics actually beat expectations. Furthermore, CEO Lourenco Goncalves was optimistic that the recent increase in steel tariffs should soon benefit the company.

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Cleveland delivers a beat, though it has a ways to go

In the second quarter, Cleveland-Cliffs saw revenue decline by 3.1% to $4.9 billion, while adjusted (non-GAAP) earnings per share (EPS) fell to a loss of $0.50 per share from a positive $0.11 EPS in the year-ago quarter.

Despite year-over-year declines, those figures actually came in ahead of expectations. It was also an especially trying quarter for carmakers in the wake of April 2 "Liberation Day" and the uncertainty that followed. Of note, autos encompass a significant part of Cleveland Cliffs' revenue.

Still, Goncalves struck a an optimistic tone, saying that the recent steel tariffs were on the brink of helping Cleveland-Cliffs more than they were hurting demand, In the earnings press release, he said:

We have started to see the positive impact that tariffs have on domestic manufacturing, protecting domestic jobs and national security. We expect this trend to continue, promoting the resurgence of the American automotive industry supported by a thriving domestic steel industry. ... Going forward, foreign competitors need to acquire steel capacity within the United States if they want to participate in this desirable market. As a publicly traded America-based company centered on automotive, electrical steels, stainless and plate, Cleveland-Cliffs' assets, business and footprint are uniquely positioned to benefit from this new reality.

Image source: Getty Images.

But much remains in doubt for Cleveland-Cliffs

While Goncalves' statement is encouraging, it's not the first time he has been exceedingly optimistic about Cleveland-Cliffs' prospects. Moreover, it's unclear exactly how new tariffs will impact Cleveland-Cliffs' near-term financials.

After all, amid the initial demand destruction resulting from new tariffs, Cleveland-Cliffs actually idled one its major blast furnaces, and either fully idled or partially idled several of its iron ore mines. And while tariffs have curtailed foreign competition, the market share of imports for finished steel have only declined by 5 percentage points, from 25% in January to 20% in May. While management predicts increased demand for steel and decreased exports over time, we have yet to see material evidence of that big advantage for domestic steelmakers.

At the moment, Cleveland Cliffs is losing money and cutting costs in an attempt to produce cash flow to pay down its debt; in that light, it would be better for investors to take a wait-and-see approach to see if the purported tariff benefits really materialize. As of now, there is too much uncertainty to chase today's rally in the stock.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.