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Why Cliffs Natural Resources Inc (CLF) Earnings Will Look Ugly Again

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Cliffs Natural Resources Inc (NYSE:CLF) will release its quarterly report on Thursday, and investors have gotten used to bad news from the once-promising coal and iron ore producer. As levels of construction and infrastructure-building activity have plunged in formerly hot growth areas like emerging markets, the market for steel production has largely evaporated, and that has had a highly negative impact on Cliffs earnings.

The big question facing Cliffs Natural Resources Inc (NYSE:CLF) investors, though, is whether the turn downward in the industry just represents a normal cyclical drop that will eventually give way to growth again. As the worst performer in the S&P 500 this year, the stock is priced to reflect virtually no chance of a recovery anytime soon, but if the company gets some help on the macroeconomic front, then share prices could finally begin to mend. 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 quarterly report.

Stats on Cliffs Natural Resources

Analyst EPS Estimate $0.62
Change From Year-Ago EPS (62%)
Revenue Estimate $1.42 billion
Change From Year-Ago Revenue (12.4%)
Earnings Beats in Past 4 Quarters 1

Source: Yahoo! Finance.

Will Cliffs earnings bounced back this quarter?
Despite the big drop in Cliffs Natural Resources Inc (NYSE:CLF) earnings, analysts have actually gotten slightly less pessimistic about the company in recent months, boosting their June quarter estimates by almost a dime per share and raising their full-year 2013 views by about 25%. But they’ve also cut their 2014 estimates by almost a third, and the stock has failed to bounce back from its plunge earlier in the year, with shares up just 2% from its lowest levels in mid-April.

Cliffs Natural Resources Inc (NYSE:CLF)Cliffs Natural Resources Inc (NYSE:CLF) actually came into the quarter with a bit of positive momentum, after the company managed to beat modest expectations in its first-quarter earnings report. As painful as a 6% drop in sales and falling net income that amounted to just barely a quarter of what the company earned the previous year might be, Cliffs still nearly doubled what analysts had expected to see. That sent the beaten-down shares up 17% in a single day, despite the fact that troubling trends in global iron ore sales and prices could continue to weigh on the company well into the future.

But the problem for Cliffs Natural Resources Inc (NYSE:CLF) is that like many of its peers, its future remains tied to macroeconomic conditions in China and other high-growth areas of the world, and those areas haven’t held up as well as the U.S. economy has. Other economically sensitive materials producers have seen similar trends, with United States Steel Corporation (NYSE:X) expected to go from a profit last year to a sizable loss this year. Moreover, even though aluminum giant Alcoa Inc (NYSE:AA) has managed to hit bottom as far as its earnings are concerned, it nevertheless faces strong headwinds from both a lack of demand in China and substantial production activity from Chinese rivals in the aluminum industry. Investors have awarded all three stocks with low price-to-book ratios, but given the current malaise in the industry, it appears more likely that book values are artificially high than that share prices are true bargains.

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