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Is There More Upside to Cliffs’s Earnings Estimates?

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Jan. 31 2017, Updated 6:55 p.m. ET

Analysts’ estimates

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

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Upward revision

Analysts are expecting EBITDA of $343 million for the next four quarters for Cliffs Natural Resources (CLF). These estimates have been revised upwards by an impressive 78% in the last year. As we’ve discussed previously in this series, many positive developments lately, such as the restart of United Taconite, the signing of a new agreement with ArcelorMittal (MT), and firm steel prices in the United States, have been the major reasons behind these upgrades.

Cliffs’s EBITDA of $343 million for 2016 and $539 million for 2017 imply EBITDA margins of 16.8% and 23.9%, respectively. Its actual EBITDA margin for 2015 was just 14.6%. Cliffs’s better-than-expected cost-cutting efforts may have encouraged analysts to raise their EBITDA and margin estimates.

Key drivers

Cliffs’s EBITDA are usually impacted by US (SPY) (IVV) hot rolled coil and seaborne iron ore prices. Seaborne iron ore prices have remained very strong and are currently hovering around $80 per ton. Spot steel prices also recovered handsomely towards the end of 2016. This recovery will be visible in steelmakers’ and Cliffs’s 1Q17 earnings, due to lead times. An upward revision should see higher earnings estimates for US steel companies such as Cliffs Natural Resources (CLF), U.S. Steel Corporation (X), AK Steel (AKS), and ArcelorMittal (MT).

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