Iron Ore and Auto Sales: CLF
This morning CNBC recommended Cleveland Cliffs as a stock to buy. They are an iron ore and steel company. If we have a recession, what happens to earnings?
Auto production rates are an easy indicator. Statistica shows US numbers–
In a good year, the industry can sell 18MM new vehicles. Most recent number 2021 is 14.9MM. Projection for 2023 is 14.8MM, essentially flat.
Worst year of recent record is 2009 when the number was 10.4MM.
In a recession, how much can auto production fall? About 30%.
Is that a reasonable estimate for steel and iron ore?
What do you think?
I think your fears are valid. My take on this sort of position has been the major miners (BHP, Rio Tinto and Vale) as they may make less money in a down cycle, but they retain the assets which can be sold (inflation adjusted) at a later date.
I think any of us does the logical thing in a bad or not so good time (it wont be the worst of recessions) you buy at the bottom. Certainly better than buying in the best of times.
I dusted off some annual reports, went to income statements and played with the numbers. I did Sherwin Williams and Dow Chemical.
It looks like the answer is that a 30% reduction in sales results in a 40% reduction in earnings per share.
Administrative expense is usually the largest expense item. Some call it SARE for sales, administration, research, and engineering. Its usually about 80% of expenses. You also have to trim it too to have any hope of reasonable numbers.
So this gives some handle on what could happen to earnings of cyclical manufacturing stocks if we get a real recession. Does PE change in a recession? Or can you reduce share prices expected by similar numbers.
Something to think about.