Is Cliffs Natural Resources Great or What?

For every stock out there screaming, "buy me," others simply give us a nudge and a nod. While all the attention might be focused on their five-star peers, we can sift through Motley Fool CAPS to find four-star stocks giving us the "high sign" that they're approaching greatness. 

These opportunities -- including familiar names and beaten-down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. This time out we'll take a look at iron ore and coal miner Cliffs Natural Resources (NYSE: CLF  ) , a less obvious source for tomorrow's great buys.

Cliffs Natural Resources Snapshot

Market Cap $2.0 billion
Revenues, TTM $0 million
1-Yr. Stock Return 6.2%
Return on Investment (92.4%)
Dividend and Yield NA/NA
Recent Price $14.86
CAPS Rating (out of 5) ****

Of course, just because the 180,000-member CAPS community has chosen this stock as one being on the road to greatness doesn't mean you should buy in, too. Due diligence is still required, but let's see why they think it might merit your attention.

In the sight of greatness
Investing in the coal industry these days certainly requires a level of contrarianism. Coal prices have fallen as well, particularly for thermal coal, but new air-pollutant regulations from the EPA are encouraging utilities to convert from coal to natural gas, so there's little incentive for them to build coal-fired plants. And with natural gas also at its cheapest level in decades, there's little incentive for utilities to stay with coal.

The onslaught of trends has crushed the valuations of coal miners. Shares of Arch Coal (NYSE: ACI  ) have lost more than three-quarters of their value while Alpha Natural Resources (NYSE: ANR  ) is down 85% over the past 12 months. In comparison, Cliffs has lost "only" half of what it traded at last year. Patriot Coal, of course, just declared bankruptcy.

But of course, coal is only half the story (actually, it's just 8% of the story), which is why the stock is such an interesting play. Cliffs is also the largest producer of iron ore pellets in North America. Along with five met coal mines and one thermal coal mine (after it sells another a previously committed thermal coal mine in Australia), it also operates five iron ore mines in Michigan and Minnesota and two more in Canada that provide iron ore for the Asia-Pacific region. It also has an interest in an iron ore mine in Brazil.

Despite a weak economy here at home, revenues for Cliffs rose 7% in the first quarter as higher volumes led to increased production. What hurt profits, which came in lower than last year, were falling prices compared with those enjoyed in 2011. Demand for steelmaking raw materials stayed strong.

The current condition of the world economy, though, including the European sovereign-debt crisis, may affect Cliffs' results going forward if they deteriorate much more. ArcelorMittal (NYSE: MT  ) says there's a "severe imbalance" between supply and demand in Europe, and it may close more steel plants there. U.S. Steel (NYSE: X  ) noted that while its own first-quarter results improved, the continent was a wild card and remained challenging.

At less than five times earnings Cliffs trades at lower values than any of its iron ore competitors (coal stocks just aren't profitable these days), which when compared with its projected growth rate makes it a steel -- er, steal. But with its enterprise value going for just 12 times its free cash flow, I think Cliffs is a bargain-basement stock that's not being fully appreciated by the market.

CAPS member MarkP28665 concurs with the discount it's offering, but adds that "at under 5x earnings and a nice dividend I intend to sit on this until the demand for steel improves which in turn would raise the demand for [Cliffs'] iron ore and coke."

With more than 1,500 other members weighing in, it's probably why 96% of them think it will outperform the broad market indexes. Let me know in the comments box below if you think it can dig down to recover, and then head over to the Cliffs Natural Resources CAPS page and weigh in on its prospects yourself.

A great opportunity for you
Investor sentiment suggests that these four-star investments are on their way to five-star greatness, and if a recovery takes hold, there will be more than just one winner. You can read The Motley Fool's report on "3 ETFs Set to Soar During the Recovery" that points the way to profits as the recovery strengthens in emerging markets, energy, and the technology sector. This report will be available only for a limited period. Get it before it's gone!

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of ArcelorMittal. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2012, at 1:43 PM, DelOjoZafado wrote:

    I really don't see the Met Coal story in your analysis of this company. It is the met coal resources that along with the Iron ore production that make this company a valuation play. I have taken 3 tranches in this stock for yield at $51.07, $48.62 and $44.62.

    While Walter is possibly the more likely next buyout in the Met coal space, given the softness in the economy and the global economy as well, I am avoiding Walter as it may be a long time before one of these two are bid for. In the mean time with the near double market cap of Walter, CLF's market cap of $7.5 billion makes me believe the current 5.4% yield is sustainable against the earnings your article points to. Sustainable until the buy out offer such as Grande Cache just closed on in Feb for what was a near 50% premium to the PPS at the announcement of the deal. That was still $2 below that stock's 52 week low. That was a Chinese company using a Japanese financier (carry trade in yen into commodities) to take out Grande Cache. Teck paid a similar ridiculous premium for Fording. CLF is now so cheap as against it's 2 year high of over $100 that it is impossible to hide from those out there globally looking to employ a Warren Buffet strategy and offer something near $60/Sh for the whole thing.

  • Report this Comment On July 24, 2012, at 11:23 PM, gloglu02 wrote:

    "Cliffs Natural Resources Snapshot" data shown is for a different company, since they are way off from CLF's....

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