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What's in the Cards for Cliffs (CLF) This Earnings Season?

Cliffs Natural Resources, Inc. CLF is scheduled to release second-quarter 2017 results before the opening bell on Jul 27.

Cliffs had reported first-quarter 2017 loss of 11 cents per share, comparing unfavorably with the Zacks Consensus Estimate of earnings of 16 cents. Sales in the quarter came in at $461.6 million, surging 51% from $305.5 million in the prior-year quarter. Sales also topped the Zacks Consensus Estimate of $373 million.

The company surpassed the Zacks Consensus Estimate in two of the trailing four quarters while missing in the other two, with an average negative surprise of 3.82%.

Can Cliffs surprise investors again or is it heading for a possible pullback? Let’s see how things are shaping up prior to this announcement.

Cliffs Natural Resources Inc. Price and EPS Surprise


Factors to Consider

For 2017, Cliffs now expects to generate net income of roughly $380 million, down from its earlier view of $510 million.The revised outlook is based on assumptions on realization of Asia Pacific Iron Ore revenues, which are likely to be impacted by lower IODEX prices, heavy iron ore content discounts and lower lump premiums.

The company projects its full-year selling, general and administrative (SG&A) expenses to be around $100 million of which $25 million is expected to be non-cash expenses.

The company's interest expense for 2017 is anticipated to be roughly $175 million, of which $20 million is expected to be non-cash.

Cliff’s remains focused on deleveraging its balance sheet and improving its cost structure. The company’s net debt fell to roughly $1.3 billion at the end of first-quarter 2017 from around $1.8 billion at the end of 2016.

Moreover, Cliffs is boosting its mining capacity and is expected to benefit from its pellet supply contracts with its U.S. iron ore customers. Cliffs is also focusing on managing costs, evident from a decline in overall cash costs in 2016. Moreover, a roughly 7% year over year decline in cash cost was witnessed in the first quarter. The company’s cost actions are expected to lend support to its earnings in the to-be-reported quarter.

Cliffs is also expected to gain from its supply deals with other companies. The ArcelorMittal MT deal allows Cliffs to supply up to 10 million tons of pellets to ArcelorMittal USA. The company also entered into a contract with U.S. Steel Canada to supply pellets. The agreement exceeded the company's original sales expectations. Also, the company is expected to gain from an increased steel demand in the U.S.

However, the company remains exposed to a challenging operating environment and pricing pressure. Iron ore prices are expected to remain under pressure in the second half of 2017 due to rising global supplies. Cliffs has cut its profit outlook for 2017 due to lower expected iron ore pricing.

Cliffs’ shares have moved up around 2.5% over the last one year underperforming the industry’s 65.4% gain.

Earnings Whispers

Our proven model does not conclusively show that Cliffsis likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:

Zacks ESP: Earnings ESP for Cliffs is currently 0.00%. This is because both the Most Accurate estimate and Zacks Consensus Estimate are pegged at 18 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Although Cliffs’ Zacks Rank #3 increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Note that Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

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

Westlake Chemical Corporation WLK has an Earnings ESP of +5.04% and a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

The Chemours Company CC has an Earnings ESP of +4.44% and a Zacks Rank #1.

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