Cliffs Natural Resources (CLF +0.83%) will release its quarterly report on Thursday, and shareholders have to be pleased to see the stock having bounced off its recent lows and climbed almost 50% higher in recent months. Yet with earnings expected to contract from now through 2014, the big question is whether Cliffs Natural can survive a shakeout in the commodities industry that has led to big losses for more coal-focused mining companies Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR).
Cliffs got hit by tough conditions in both of its key markets, as a severe slowdown in construction activity led to weaker steel production, which in turn weakened demand for its iron ore and metallurgical coal resources. Although some signs of improving conditions in the global economy have appeared, investors remain cautious about whether past levels of activity will return. Until they do, prices for iron ore and met coal could remain low, threatening Cliffs' profit growth. Let's take an early look at what's been happening with Cliffs Natural Resources over the past quarter and what we're likely to see in its report.
Stats on Cliffs Natural Resources
|
Analyst EPS Estimate |
$0.66 |
|
Change From Year-Ago EPS |
8.2% |
|
Revenue Estimate |
$1.46 billion |
|
Change From Year-Ago Revenue |
(5.8%) |
|
Earnings Beats in Past 4 Quarters |
2 |
Source: Yahoo! Finance.
Why are investors more excited about Cliffs earnings?
In recent months, analysts have boosted their near-term calls for Cliffs earnings, raising third-quarter estimates by almost $0.20 per share and boosting full-year 2013 projections by $0.50 per share. Even though they've cut their full-year 2014 calls by about 17%, the stock has still reacted favorably, climbing 34% since mid-July.
Cliffs actually started the quarter off well, with earnings that beat Wall Street's lowered expectations. Despite sluggish demand, Cliffs noted that iron-ore inventories in China are at their lowest levels in years, suggesting that conditions in the market could get better soon. Cliffs is still facing weak prices and big drops in year-over-year revenue and net income, but it appears that the worst might be over. By contrast, Arch Coal and Alpha Natural Resources could continue to see losses, as their greater emphasis on thermal coal puts them at a competitive disadvantage because of thermal coal's less favorable potential as an exportable commodity.
One big success for Cliffs has come from its cost-cutting operations. During the second quarter, Cliffs slashed selling, general, and administrative expenses by 44%, and it hopes to cut $15 million more from overhead in future. By doing so, Cliffs has reduced its debt and is now in position to spend more on capital expenditures in an attempt to grow its business. Arch Coal's and Alpha Natural's cost-cutting measures have been more difficult to implement, and unlike Cliffs, Arch and Alpha might need to focus more on closing down mines to cut enough costs to make a difference to their respective businesses.
Recently, investors have started to see some turnaround potential from Cliffs. Last week, analysts at Cowen upgraded the company, pointing to a new management team as a potential catalyst for a move higher. As economic data in China have started to perk up, so too have opinions about the possibility of greater steel demand that could boost Cliffs' revenue.
In the Cliffs Natural Resources earnings report, watch to see how the company is progressing with its plans to replace retiring CEO Joseph Carrabba by the end of the year. With so much going on in the industry, Cliffs needs to make sure it avoids Arch Coal's and Alpha Natural's losses and finds ways to profit no matter how tough the environment gets.
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