Why Analysts Downgraded Cleveland-Cliffs’s Earnings Estimates



CLF’s earnings drivers

The drivers for Cleveland-Cliffs’ (CLF) top and bottom lines are quite different from the miners we’ve discussed in the previous parts of this series such as Rio Tinto (RIO), BHP (BHP), and Vale (VALE). The majority of CLF’s revenues and earnings in US (SPY)(SPX) iron ore are tied to US steelmakers (SLX).

Currently, US steel imports and US steel prices are the major factors impacting estimates for Cliffs.

Analysts’ revenue projections for CLF

The Wall Street analysts covering Cleveland-Cliffs are estimating revenues of ~$2.35 billion in 2017, which implies growth of 11.5% YoY (year-over-year). This expected growth is due to the slightly higher volumes for Cliffs and higher US steel prices. Investors should, however, note that the estimates for Cliffs’s revenues have been downgraded several times in 2017, mostly because of Cliffs’s downgrade of its earnings and volume guidance in 2017. The revenue growth for 2018 and 2019 is muted, at -0.6% and -3.5%, respectively.

EBITDA estimates

Analysts expect Cleveland-Cliffs’ EBITDA (earnings before interest, tax, depreciation, and amortization) to come at $500 million for 2017. This estimate has been downgraded several times since the start of 2017, in line with the company’s downgrade of its EBITDA guidance. With its 1Q17 results, CLF downgraded EBITDA guidance from $850 million to $700 million. With its 2Q17 results, it further downgraded the guidance to $650 million. In its latest results, the company stopped providing guidance. The implied margins for 2017 are still high at 21.3%, compared to 16.9% in 2016.

According to analysts, 2017 could represent a peak in CLF’s EBITDA margins. The margins for 2018 and 2019 are expected to be lower, at 19.7% and 15.9%, respectively.

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