Stock of the Week
Cliffs Natural Resources
NYSE Symbol: CLF
Industry: Iron Ore
Price of 3/30: $69.26
It's the end of the quarter and what a quarter it has been. Virtually everything worked this quarter with only one down day of more than 100 points to speak of. With the markets up so much it's getting tougher and tougher to find good value. The utilities were the only sector to trade lower this quarter for good reason. They were the best performing sector last year and ended the year at a higher valuation than the broader market. The only other sector to underperform has been energy and commodity related stocks. The commodity and energy space have come under pressure due to concerns of slowing economic growth not only in Europe, but in emerging markets like the BRIC countries China, India, and Brazil. But longer term, the demand for commodities around the world will only go higher and higher. This week I'll feature a commodity stock in the iron ore space. The stock of the week is Cliffs Natural Resources. Demand for iron ore has exploded over the last several years. Back at the end of 2008 Cliffs was losing money, but now the company is generating $1.6 billion in profits. The strong earnings and cash flow have allowed the company to hike their dividend. Case in point, Cliffs recently hiked their dividend by 123% pushing the yield up to 3.5%. Pretty darn good for a commodity stock. I may be early in featuring the stock, so cautious investors may want to wait and watch how the second quarter develops, but longer term the company is well positioned to keep generating strong earnings with more dividend hikes.
The primary reason commodity stocks have succumbed to recent weakness is due to an economic slow down in China. It's well documented that China is slowing from 10% GDP growth to a projected 7.5% growth rate this year. The big question remains will China be able to create a soft landing or will it be a hard landing. Most analyst and investors are betting on a soft landing while one JP Morgan analyst is on the record saying China is in the middle of a hard landing. Either or the slow down has hurt demand for commodities like copper, coal, and iron ore. Cliffs Natural Resources produces both iron ore and coal. Rival, BHP Billiton has recently made comments speaking in Australia, indicating that iron ore demand from China would be slowing down to single digits, if it is not already there. Other global commodity companies have made similar comments about slowing growth.
The valuation for Cliffs Natural Resources remains compelling and hopefully pricing in some of the slow down. Currently, the stock trades for 7 times earning and 6 times next year's earnings. Very cheap, but Cliffs historically trades for a modest PE. The stock also trades for 1.5 times sales and 1.7 times book value of $41 a share. Even though the company has a low PE, the strong earnings and cash flow are good news for the dividend. The dividend has gone from 4 cents a quarter back in 2009 to 62.5 cents a quarter now. The current 3.5% dividend should reduce some of the volatility in the stock and provide some support going forward thanks to investors' demand for current income. In the short term the stock probably has more downside, but longer term the stock and the company's fundamentals should continue to perform quite well.