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Why EBITDA Estimates for Cliffs Are Skyrocketing

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Jul. 11 2016, Updated 3:06 p.m. ET

Analysts’ EBITDA estimates

Analysts’ EBITDA (earnings before interest, tax, depreciation, and amortization) estimates are usually derived from revenue projections as well as margin assumption or through cost projections.

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Upward revision

Analysts are expecting EBITDA of $355 million for the next four quarters for Cliffs Natural Resources (CLF). These estimates have been revised up by an impressive 45% since the start of the year. As we’ve discussed previously in the series, many positive developments lately such as the early restart of United Taconite, the signing of a new agreement with ArcelorMittal (MT), and firm steel prices in the US have been the major reasons behind these upgrades.

Cliffs’s EBITDA of $340 million for 2016 and $401 million for 2017 imply EBITDA margins of 17% and 19.8%, respectively. Its actual EBITDA margin for 2015 was just 14.6%.

Cliffs’s better-than-expected cost-cutting efforts might have encouraged analysts to increase their EBITDA and margin estimates.

More upside?

Analysts have most likely not factored in higher US (SPY) (IVV) hot rolled coil (or HRC) steel prices for the long term. The HRC prices are expected to remain at elevated levels going forward. This has driven some analysts to revise their earnings upward. But there are many others who haven’t revised the price.

An upward revision should see higher earnings estimates for US steel companies such as Cliffs Natural Resources (CLF), United States Steel (X), AK Steel (AKS), and ArcelorMittal (MT).

In the next part of our series, we’ll take a look at Cliffs’s net debt estimates.

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