Is Cliffs Natural (CLF) Poised For A Beat In Q1 Earnings?

Cliffs Natural Resources, Inc. (NYSE:CLF) is scheduled to release first-quarter 2017 results before the opening bell on Apr 27.

Cliffs’ adjusted earnings for the fourth quarter of 2016 came in at 41 cents per share, beating the Zacks Consensus Estimate of 25 cents. The company surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive surprise of 57.33%.

Sales for the quarter came in at $754 million, surging 58.4% from $476 million in the prior-year quarter. Sales also beat the Zacks Consensus Estimate of $688.5 million.

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.

Earnings Whispers

Our proven model shows that Cliffs is likely to beat the Zacks Consensus Estimate this quarter, because a stock needs to have both a positive Earnings ESP Filter .

Zacks Rank: Cliffs currently carries a Zacks Rank #3, which when combined with a positive ESP, make us reasonably confident of an earnings beat.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors to Consider

For 2017, Cliffs expects to generate net income of $510 million. The company projects its full-year selling, general and administrative (SG&A) expenses to be around $100 million, an $18 million decrease from 2016, of which $25 million is expected to be non-cash expenses.

The company will benefit from its pellet supply contracts with U.S. iron ore customers. It will help to mitigate the impact of volatility in iron ore pricing in global markets. Cliffs should also gain from major supply pacts with ArcelorMittal (NYSE:MT) and U.S. Steel Canada to supply pellets, ensuring steady business growth in the segment.

Moreover, steel demand in the U.S. is expected to be driven by strength in the automotive sector and an expected increase in construction activity, which augurs well for iron ore demand. Steel market conditions in the U.S. have improved of late, driven by favorable developments on the import front in the form of imposition of heavy tariffs on imports.

Cliffs is also focusing on cost management, reflected by a decline in overall cash costs in 2016. The company’s cash costs for the U.S. operation fell roughly 7% year over year to $55.97 per long ton in 2016. The company’s cost initiatives are also expected to support its earnings in the first quarter. The company has also implemented a strategic capital allocation plan to ensure optimum utilization of cash.

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Cliffs remains focused on de-leveraging its balance sheet. The company’s net debt fell around 25% year over year to around $1.8 billion at the end of 2016. The company redeemed all of its outstanding senior notes due in Jan 2018 in third-quarter 2016, reducing its interest expense by $17 million a year. Cliffs’ sustained commitment to reduced debt will further lower its interest expenses, which would lend support to its earnings.

However, Cliffs’ shares lost around 19.3% over the past three months underperforming the Zacks categorized Mining-Iron industry’s 18% loss.

Stocks That Warrant a Look

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

The Chemours Company (NYSE:CC) has an Earnings ESP of +4.08% and carries a Zacks Rank #1. You can see Zacks Investment Research