A Look at Cliffs’ Earnings Estimates following the Trump Boost



Revenue drivers

The factors affecting Cliffs Natural Resources (CLF) are quite different than those affecting global iron ore players Rio Tinto (RIO) and BHP Billiton (BHP).

Most of Cliffs’ revenue is tied to the domestic US (QQQ) steel market. US steel prices and orderbooks for customers are the major revenue drivers for Cliffs’ US division.

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Analysts’ projections

Analysts’ revenue projections are proxies for volumes sold multiplied by prices received for mining companies. Wall Street analysts covering Cliffs Natural Resources project sales of $2.0 billion in 2016.

Since the start of 2016, analysts have increased their revenue projections from ~$1.8 billion to ~$2.0 billion for the year. This revenue projection implies a rise of 3.0% year-over-year (or YoY). Cliffs’ actual revenue fell 41.0% YoY in 2015.

Cliffs has also upgraded its sales and production guidances. Its revenue projection for 2017 implies a rise of 5.5% YoY. Following Donald Trump’s US presidential win, analysts have increased their estimates for steel prices going forward.

Earnings estimates

Analysts have consistently revised their EBITDA (earnings before interest, tax, depreciation, and amortization) projections upward for Cliffs. Its EBITDA estimate for 2016 now stands at $323 million, implying a margin of 16.1%. The margin for 2017, however, is significantly higher at 20.4%.

This upward revision was mostly due to higher steel prices and certainty regarding futures volumes after a new contract with ArcelorMittal (MT). Trump’s win and his take on protectionism and infrastructure spending may have encouraged some analysts to turn more optimistic. Cliffs’ better-than-expected cost-cutting efforts may also have encouraged analysts to increase their EBITDA estimates. Watch steel prices in the domestic US steel market to get a sense of Cliffs’ future earnings.

Any weakness in steel prices could lead to a downward revision in earnings estimates for US steel companies such as Cliffs, U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT).


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