What Could Be the Next Big Catalyst for CLF’s Earnings Revision?



Revenue drivers

Despite being an iron ore pellet provider, 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 Natural Resources’s revenue is tied to the domestic US (QQQ) steel market. US steel prices and orderbooks for customers are the major revenue drivers for the company’s 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 for Cliffs Natural Resources (CLF) 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). CLF’s actual revenue fell 41.0% YoY in 2015.

Cliffs Natural Resources also upgraded its sales and production guidance. Its revenue projection for 2017 implies a rise of 10% 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[1. earnings before interest, tax, depreciation, and amortization] projections upward for CLF. Its EBITDA estimate for 2016 now stands at $321 million, implying a margin of 16.0%. The margin for 2017, however, is significantly higher at 21.8%.

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 Natural Resources’s better-than-expected cost-cutting efforts may also have encouraged analysts to increase their EBITDA estimates. You can watch steel prices in the domestic US steel market to get a sense of the company’s future earnings.

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


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