Iron ore and metallurgical coal company Cliffs Natural Resources Inc. (NYSE:CLF) has been pounded by weak demand for steel in the last year (metallurgical coal is used to produce steel, as opposed to thermal coal which is a fuel for electric utilities). The stock is down 70% in the last year in what has been a more or less steady decline, while the S&P 500 index is up. A number of market players are still bearish on Cliffs, going by the fact that the most recent data shows 23% of the outstanding shares held short. However, Wall Street analysts are forecasting a recovery at the company, with consensus earnings for 2014 implying a forward P/E of 9.
In 2012, revenues decreased 11% from a year earlier (though sales were higher than in 2010). A large impairment charge caused Cliffs to report negative operating income; if we add back impairments, we still get a heavy decline in operating income due to the fact that cost of goods sold was actually higher in 2012. Pretax income seems to have been down by over 75% after addbacks. The decline seems to have moderated in percentage terms by the time we get to the end of the year- specifically, revenue was down only 4% last quarter compared to the fourth quarter of 2011- but that is still a hardly promising sign. Adjusted EPS for the quarter were 41 cents, which when annualized would give an earnings multiple of 13; at that valuation we like to see at least modest earnings growth.
Part of our work is tracking 13F filings from hedge funds and other notable investors, using them to develop investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). We can also use this information to review holdings of Cliffs Natural Resources Inc. (NYSE:CLF) as of the end of December. For example, billionaire Steve Cohen’s SAC Capital Advisors increased its holdings of Cliffs by 11% during the fourth quarter of 2012 to a total of 3 million shares (see Cohen’s stock picks) while Fisher Asset Management, managed by billionaire Ken Fisher, reported a position of about 830,000 shares at the end of December. Find Fisher’s favorite stocks.
Alpha Natural Resources, Inc. (NYSE:ANR), CONSOL Energy Inc. (NYSE:CNX), and Peabody Energy Corporation (NYSE:BTU) are three other coal companies, though these peers provide both metallurgical and thermal coal (also known as steam coal). In terms of forward earnings estimates, Cliffs Natural Resources Inc. (NYSE:CLF) inspires the most confidence among analysts of the lot. Alpha is actually forecast to be unprofitable in 2014, as it was in 2012; that stock is another popular short target and in the fourth quarter of 2012 its revenue decline versus a year earlier was quite severe at 20%. CONSOL experienced double-digit percentage declines on both top and bottom lines- again, a weaker performance than we saw at Cliffs- and while it is expected to be profitable its forward earnings multiple of 16 represents a premium. Peabody, like Cliffs, was carried into unprofitability for 2012 by an impairment charge and it’s at least a bit closer when we look at changes in its topline. Still, it looks to us that Cliffs is more stable than these coal companies in addition to having a better outlook from the Street.
For a company more purely exposed to steel demand, it’s hard to top United States Steel Corporation (NYSE:X). A considerable percentage of shares outstanding are held short as U.S. Steel turned in its third consecutive year of unprofitability in 2012 (though some of this was due to special items, and net losses in Q4 were smaller than expected). It’s another stock where the Street is expecting rapid improvement (resulting in a forward P/E of 9). However, the continuous unprofitability leads us to be skeptical.
While Cliffs Natural Resources Inc. (NYSE:CLF) does look like it has a higher upside than many of its peers, we aren’t quite ready to recommend it as a value stock. Given the annualization of last quarter’s earnings per share we think that we would wait a quarter or two to see if the company can start actually increasing its sales and earnings and be clearly profitable for 2013.
Disclosure: I own no shares of any stocks mentioned in this article.
