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Do Analysts’ Estimates for Cliffs Have Still More Downside?

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Analyst recommendations

Currently, the majority of analysts recommend a “sell” for Cliffs Natural Resources (CLF). Of the analysts covering Cliffs, one analyst has a “buy” recommendation, seven have “hold” recommendations, and seven have “sell” recommendations for Cliffs’ stock.

The average target price for Cliffs is $2.80 compared with its current market price of $1.60, representing a potential return of 76%. Cliffs forms 3% of the SPDR S&P Metals and Mining ETF (XME).

In comparison, Nucor (NUE) and Steel Dynamics (STLD) have no “sell” recommendations, with 63% and 89% “buy” recommendations, respectively. US Steel (X) and AK Steel (AKS) have 21% and 11% “buy” and 32% and 22% “sell” recommendations, respectively.

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Analysts’ rating changes

Deutsche Bank has downgraded Cliffs to “sell” from “neutral” on December 17 due to balance sheet concerns. It also cut its target price by 50% from $3.00 to $1.50 for Cliffs’ stock.

Many brokers, including Bank of America Merrill Lynch, Nomura Securities, and Citigroup, have also reduced their target prices for Cliffs since its 3Q15 results were released. Most of the downside is likely due to the volume downgrade by Cliffs’ management and more expected weakness going forward.

Room for downside to estimates?

Analysts are projecting sales of $1.9 billion for the next four quarters and EBITDA (earnings before interest, tax, depreciation, and amortization) of $244.7 million. This implies an EBITDA margin of 12.7%. The actual numbers for the trailing four quarters are sales of $2.8 billion and EBITDA of $465.3 million, implying a margin of 16.5%. Declining sales and EBITDA are likely due to lower volume guidance from Cliffs and the negative sentiment in the US domestic steel market.

Many analysts have not updated their estimates recently, and there could be room for downside in the estimates. In its 3Q15 results, Cliffs had guided for US realized revenue per ton of $80–$85 per ton if the benchmark seaborne iron ore prices remain at $55 per ton or above.

At prices below that, the realized revenue per ton would fall to $75–$80 per ton. Currently, the seaborne iron ore prices are trading below $40 per ton, and market participants believe they are expected to remain weak going forward so that supply demand adjustments can take place.

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