What’s impacting market sentiment?
The majority of Cliffs Natural Resources’ (CLF) revenues and earnings come from US steel sector clients. The US steel sector and iron ore prices went through a very bad phase in 2015. In 2016, things have started to improve as trade cases led to huge penalties and consequently lower imports. This benefitted US steel companies such as U.S. Steel (X) and AK Steel (AKS), which are the major clients for Cliffs. The seaborne iron ore prices have also been holding firm. Previously, weaker long-term iron ore fundamentals coupled with Cliffs’s high debt had put a strain on its ratings.
On May 31, 2016, J.P. Morgan (JPM) upgraded Cliffs from “neutral” to “buy.” JPM was positive about the upside to Cliffs’s price due to improving US (VTI) steel prices. JPM stated, “We are upgrading Cliffs to Overweight from Neutral and reinstating a December 2016 price target at $7. We believe Cliffs has significantly higher near-term earnings growth as rising steel sheet prices should lead to higher realized pellet prices (and earnings) for the remaining quarters in 2016 given the pricing mechanism of Cliffs’ U.S. Iron Ore contracts.”
Macquarie also upgraded Cliffs from “neutral” to “buy” on June 10, 2016. It also increased the stock’s target price from $4.00 to $7.50. It believes Cliffs’s earnings should be supported by higher US steel prices and volumes. On June 17, 2016, Macquarie reiterated its “buy” recommendation for the stock.
An upward revision in the revenue and earnings estimate could lead to more upgrades for CLF stock in the future.
In the next part of this series, we’ll see if analysts have also started revising their revenue and earnings estimates for Cliffs Natural Resources.