What to Expect from Cliffs Natural Resources’s 1Q17 Earnings

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Part 10
What to Expect from Cliffs Natural Resources’s 1Q17 Earnings PART 10 OF 10

Factors That Could Drive Cliffs Natural Resources’s Valuation in 2017

Valuation multiple

Valuation multiples are key metrics you should watch carefully. With the help of relative valuations, you can compare a company’s valuation with its closest peers’ valuations. There are several valuation metrics you can use.

For companies in cyclical industries such as steel and mining, the EV-to-EBITDA1 multiple is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of its EBITDA.

Factors That Could Drive Cliffs Natural Resources&#8217;s Valuation in 2017

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Cliffs Natural Resources’s valuation

The above graph shows the forward EV-to-EBITDA multiples of several steel companies. Some of them have captive iron ore mines. After the recent pullback in steel prices due to concerns over President Donald Trump’s agenda, the multiples of these companies have fallen. They rose as the result of price rises following Trump’s US presidential win.

Steel companies such as U.S. Steel (X), Nucor (NUE), Steel Dynamics (STLD), and AK Steel (AKS) are trading at a discount to their long-term trading multiples.

Cliffs Natural Resources (CLF) is trading at a forward EV-to-EBITDA multiple of 9.8x, which is in line with its trailing five-year average. This is due to the recent pullback in its stock price due to concerns over Trump’s agenda as well as weaker seaborne iron ore prices.

While Cliffs Natural Resources’s fundamentals seem to be in place, it has taken care of the biggest concern noted by investors—high debt. It has also embarked on the next phase of the process, which is growth. However, Cliffs Natural Resources has no control over commodity prices (COMT). This could lead to a derating of company’s multiple in the short term as analysts adjust their estimates lower.

It could, however, still be a long-term attractive option given the status as the sole external supplier of iron ore pellets to US steelmakers as well as attractive growth opportunities.

Other catalysts

US (SPY) (SPX) steel prices and seaborne iron ore prices are expected to remain the major drivers of Cliffs Natural Resources’s valuation going forward. More debt reduction has also worked in its favor. Any announcements about growth initiatives could lead to the stock being rerated.

Be sure to keep checking in with Market Realist’s Iron Ore page for the latest updates.

  1. enterprise value to earnings before interest, tax, depreciation, and amortization

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