Will Analysts Raise Estimates for Cliffs after 1Q18 Results?



Revenue estimates to go up

As we’ve seen previously in this series, Cleveland-Cliffs (CLF) has outperformed its own expectations in terms of sales volumes and realized prices for the US iron ore (or USIO) division in 1Q18. This has also led the management to guide for higher sales volumes as compared to its original guidance. The volumes and HRC (hot-rolled coil) prices, on the other hand, are expected to remain at a higher level than the previous year. The management’s guidance implies growth of 9.6% in sales alone. Cliffs has also reiterated its strong outlook for pricing going forward, notwithstanding the impact of Section 232 as demand outlook remains strong.

The combination of higher-than-expected sales and realized prices should lead analysts to revise their revenue estimate higher. As per the consensus compiled by Thomson Reuters, analysts are estimating revenues of $2.3 billion for 2018, implying a decline of 3.4% year-over-year (or YoY).

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Will earnings estimates be revised higher?

The higher revenues should flow down to earnings as well. Investors should note that its cost performance year-to-date has been stronger than the full-year guidance.

The above factors should also result in the company generating significant free cash flow (or FCF) this year. The improved domestic market outlook leading to higher sales and realized prices should be cash flow accretive. Moreover, its HBI (hot-briquetted plant) is pre-funded, which should lead to surplus cash, which could be used to draw down debt or dividends, at the company’s behest. The market is, however, guiding for FCF of just $94.8 million, a decline of 48% YoY. This should also go up in the coming days and weeks as analysts adjust their estimates with the company’s actual results, guidance, and the strong outlook for the market.

Among Cliffs’s US peers (SLX), AK Steel (AKS) generated FCF of -$19 million in 4Q17. The company generated negative FCF in 3Q17. U.S. Steel (X) reported FCF of $47 million in 4Q17. The company has posted positive FCF for three consecutive quarters. Nucor (NUE) posted FCF of $133 million in 4Q17, taking its 2017 cash flow to $603 million. Nucor has one of the strongest balance sheets in the steel industry. ArcelorMittal (MT) posted FCF of $1.9 billion in 4Q17.

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