Cliffs Natural (CLF) Q3 Earnings: What's in the Cards?

Cliffs Natural Resources, Inc.CLF is scheduled to release third-quarter 2016 results before the opening bell on Oct 27. Last quarter, this mining company delivered a positive surprise of 200%.

Cliffs surpassed the Zacks Consensus Estimate in all the trailing four quarters, with an average positive surprise of 91.72%.

Let's see how things are shaping up prior to this announcement.

Factors to be Considered this Quarter

Cliffs has implemented a strategic capital allocation plan to ensure the optimum utilization of cash. Its focus remains on providing maximum return to its shareholders by way of 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.

Additionally, Cliffs is focusing on cost management which will bear fruit in future reporting periods. The company anticipates reduction in SG&A costs in 2016. With an improvement in the operating performance, the company's inventory has begun to turn, thereby improving liquidity. Further, the company received $31 million cash from Minnesota Power as part of a long-term purchase agreement for the Northshore operation. Recently, the company has also inked a 20-year energy agreement with WEC Energy Group to receive a steady and affordable source of electric power for the Tilden mine in Michigan.

The company also remains focused on deleveraging its balance sheet. The company's total debt fell around 4% year over year to $2.7 billion at the end of 2015 and further reduced to $2.5 billion at the end of second-quarter 2016. In the second quarter, the company paid off $23 million for the outstanding balance of the equipment loans. Cliffs' sustained commitment to reduced debt will further lower its interest expenses.

The company recently cut a major supply pact with ArcelorMittal MT . The contract ensures that Cliffs will remain ArcelorMittal USA's sole outside iron ore pellet supplier until 2026. The new contract allows Cliffs to supply up to 10 million long tons of pellets to ArcelorMittal USA.

However, Cliffs is faced with a challenging operating environment and pricing pressure. Seaborne iron ore prices are expected to remain weak in the near future, thereby weighing on the company's revenues.

CLIFFS NATURAL Price and EPS Surprise


Earnings Whispers

Our proven model does not conclusively show that Cliffs is 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 -10.00%. This is because the Most Accurate estimate is 18 cents and the Zacks Consensus Estimate is currently pegged higher at 20 cents. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Cliffs currently has a Zacks Rank #3, which increases the predictive power of ESP. However, the company's negative Earnings ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

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

The Chemours Company CC has an Earnings ESP of +25.71% and sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

B2Gold Corp. BTG has an Earnings ESP of +25% and carries a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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