Can Cliffs Natural Bounce Back?

On Wednesday, Cliffs Natural Resources (CLF 0.12%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Cliffs Natural has been going through major problems recently, and some of its challenges finally came to a head over the past quarter. Yet can the beleaguered coal and iron-ore producer recover from its disappointing performance? Let's take an early look at what's been happening with Cliffs Natural over the past quarter and what we're likely to see in its quarterly report.

Stats on Cliffs Natural

Source: S&P Capital IQ.

Will Cliffs Natural climb out of the big hole it's in?
Analysts have been extremely pessimistic about Cliffs Natural's long-term earnings prospects recently, as they've shaved more than 40% off their full-year 2013 estimates and cut their 2014 calls by 45%. Despite having made a minor increase to their calls for the just-finished quarter, Cliffs Natural's shares have lost more than half their value since mid-January.

The crushing blow for Cliffs investors during the past quarter came in February, when the company not only disappointed investors with a poor fourth-quarter earnings report but also slashed its dividend by more than 75%. Since then, the stock hasn't been able to gain any traction at all, as it decided in March to idle its Wabush Pointe Noire iron-ore pellet plant due to unfavorable pricing and high costs.

Yet a huge problem for Cliffs is that competitors aren't slowing down on bringing new capacity online. Vale (VALE 0.37%) has opened up a new iron-ore mine in Brazil, and both BHP Billiton (BHP 1.36%) and Rio Tinto (RIO 2.36%) are looking to boost production from their mines in Australia. The result is that even if the steel industry picks up, Cliffs will still face competition that has strategic advantages in selling to high-demand areas like Asia.

Even though the growth opportunity for Cliffs seems to be on hold for the foreseeable future, some are looking at the stock as a value play. With shares fetching just 70% of tangible book value, investors are clearly concerned about the impact of the company's huge debt load on its ability to avoid measures like dilutive equity offerings in the future. Yet unless the global economy falls back into recession, long-term fundamentals for the steel industry still appear favorable, and when a recovery comes, demand for iron ore and metallurgical coal should rise.

In Cliffs Natural's quarterly report, look closely at the company's financial condition to see how long it can handle adverse conditions without having to take more dramatic capital-raising measures. If China's latest signs of slowing down keep the steel industry dormant too long, then Cliffs may find itself running out of time to take action that could nevertheless hurt current shareholders.

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