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Will Cliffs Natural (CLF) Beat Earnings Estimates in Q2? - Analyst Blog

Zacks Equity Research

Cliffs Natural Resources Inc. CLF is set to release second-quarter 2015 results before the market opens on Jul 29. Last quarter, this mining company delivered a whopping 110.53% positive earnings surprise.

Cliffs has beaten the Zacks Consensus Estimate in all of the trailing four quarters, with an average positive surprise of 271.18%.

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

Factors to Watch For

Cliffs sees continued economic growth in the U.S. to support domestic steel production and demand for steelmaking raw materials in 2015. 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. The company will also benefit from 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.

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

Cliffs is also focusing on cost management amid a weak pricing environment. Moreover, the company remains focused on deleveraging its balance sheet, which would reduce its interest expenses.

The decision to exit the Eastern Canadian Iron Ore business represents another positive for Cliffs. The company suspended production at its Bloom Lake project in Dec 2014 and ceased operations at the mine in Jan 2015. The Bloom Lake mine stopped generating any revenues and was unable to meet its obligations. Moreover, the company idled and closed its Wabush Scully Mine due to its high cost structure. Cliffs also no longer has any financial liabilities associated with the Bloom Lake operation. The move has allowed the company to shift into a pure-play U.S. iron ore supplier.

However, excess capacity is still weighing on commodity prices. Cliffs has been cosiderably challenged by declining iron ore pricing. Seaborne iron ore prices fell significantly in first-quarter 2015, hurting the company’s revenues. Prices are expected to remain under pressure, partly due to increased supply.

Earnings Whispers

Our proven model shows that Cliffs has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP: The Earnings ESP for Cliffs is 18.18%. This is because the Most Accurate Estimate stands at a loss of 9 cents and the Zacks Consensus Estimate currently is pegged at a loss of 11 cents.

Zacks Rank: Cliffs’ Zacks Rank #2 (Buy) increases the predictive power of its ESP.

Note that stocks with Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks That Warrant a Look

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

Albemarle Corporation ALB has an earnings ESP of +2.44% and holds a Zacks Rank #1 (Strong Buy).

Agnico Eagle Mines Limited AEM has an earnings ESP of +16.67% and a Zacks Rank #3 (Hold).

Axalta Coating Systems Ltd. AXTA has an earnings ESP of +3.33% and a Zacks Rank #3.

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