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Will Cliffs Natural (CLF) Beat Estimates in Q1 Earnings?

Cliffs Natural Resources Inc. CLF is set to release first-quarter 2016 results before the market opens on Apr 28. Last quarter, this mining company delivered a positive surprise of 56.25%.

Cliffs has surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive surprise of 27.66%.

Let’s see how things are shaping up for this announcement.

Factors to Watch For

Cliffs expects continued economic growth in the U.S. to support domestic steel production and demand for steelmaking raw materials. Steel demand in the U.S. is expected to be backed by strength in the automotive sector and a recovering housing market.

Cliffs is boosting its mining and transportation capacity globally. Cliffs will also benefit from its pellet supply contracts with its U.S. iron ore customers, which will help it to mitigate the impact of fluctuation in seaborne iron ore pricing.

Cliffs has implemented a strategic capital allocation plan to ensure optimum utilization of cash. Its focus remains on providing maximum return to the shareholders by way of dividend distribution and share buybacks while maintaining its organic growth pipeline. In line with this strategy, the company’s board has authorized the repurchase of shares worth up to $200 million.

Cliffs is also focusing on cost management amid a weak pricing environment, reflected in a reduction in its selling, general and administrative (SG&A) expenses in 2015. The company targets further reduction in SG&A costs in 2016.

Moreover, Cliffs remains focused on deleveraging its balance sheet. Cliffs cut its net debt by $100 million in Jan 2015, using the net proceeds from the sale of its Logan County coal assets and cash from operations. In Aug 2015, it completed a cash tender offer to purchase a significant portion of its senior notes (due in 2018).

The tender offer enabled the company to reduce its debt by $125 million along with an $18 million reduction in interest expense until maturity. The company’s total debt fell around 4% year over year to $2.7 billion at the end of 2015. Cliffs’ sustained commitment to reduced debt will further lower its interest expenses.

However, Cliffs faces a challenging operating environment and pricing pressure. Seaborne iron ore prices remain under pressure, thereby weighing on the company’s revenues. The company is also exposed to headwinds from depressed hot-rolled steel prices.

Earnings Whispers

Our proven model shows that Cliffs is likely to beat earnings estimates this quarter because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP for Cliffs is +10.35%. This is because the Most Accurate Estimate stands at a loss of 26 cents, while the Zacks Consensus Estimate is currently pegged at a loss of 29 cents.

Zacks Rank: Cliffs currently has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank of #1 (Buy), 2 (Hold) and 3 have a significantly higher chance of beating earnings. Conversely, the Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Cliffs’ favorable Zacks Rank and a positive ESP makes us reasonably confident of an earnings beat.

Stocks That Warrant a Look

Here are some other companies in the basic materials sector that you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Agnico Eagle Mines Ltd. AEM has an Earnings ESP of +50% and a Zacks Rank #3.

Albemarle Corp. ALB has an Earnings ESP of +1.18% and a Zacks Rank #3.

Ashland Inc. ASH has an Earnings ESP of +1.74% and a Zacks Rank #3.

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ASHLAND INC (ASH): Free Stock Analysis Report
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CLIFFS NATURAL (CLF): Free Stock Analysis Report
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