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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Cliffs Natural Resources

March 19th 2010 Cliffs Natural Resources
NYSE Symbol: CLF
Industry: AG
Price as of 3/19: $64.01

The markets have performed well over the last several weeks, making new 17 month highs for the major averages. As the economy slowly improves so are most sectors including the commodity space. Oil and other commodity prices are moving higher. Pricing of potash in fertilizer has been gaining traction. This week we'll feature a commodity stock with blow out earnings. The featured stock of the week is Cliffs Natural Resources. Formerly known as Cleveland-Cliffs, Cliffs was founded in 1847 in Cleveland, Ohio. Cliffs is a mining and natural resources company producing iron ore pellets, lump, and fines iron ore, and metallurgical coal. Cliffs stock has performed well over the last several months as their earnings keep getting ratcheted higher. Cliffs is not a conservative stock, but growth investors looking for a stock with positive earnings momentum should take a look at Cliffs Natural Resources.
In the middle of February, Cliff Natural Resources reported earnings $108.2 million, or 82 cents per share, compared with $53.9 million, or 47 cents per share. Cliffs easily beat estimates of 39 cents a share. Revenue slid 10% to $820.5 million from $916.3 million. The decrease was driven mainly by lower pricing in the company's businesses, which include the production of iron ore pellets and metallurgical coal for steel makers.
Despite an extremely challenging environment throughout most of 2009, Cliff achieved strong financial and strategic performances. The improving scenario in its North American Iron Ore segment enabled Cliff to end the year with most of its facilities operating at full capacity or taking steps to increase production. Cliffs expects continued stabilization of the macroeconomic environment throughout 2010 due to improving demand for steelmaking raw materials. For 2010, Cliff said it is increasing North American sales volume expectations to 25 million tons, up from a previous expectation of 23 million tons, due to improving demand from customers. The company used a number of widely published analyst estimates, which call for an average 40% increase in blast furnace pellet pricing settlements. Cliffs thinks the low point in steel production was reached in the first half of last year. Cliffs has realized notable improvements in its operations and business outlook across the board. On the customer front, 25 out of 39 blast furnaces are running in North America. Recently, Cliff has seen additional restart announcements from customers and expects these will push North American steelmaking capacity utilization above the 70% threshold. Cliff says its long-term sales agreements with North American steel producers substantially mitigated lower pellet prices during the downturn. Cliffs believes its North American coal business is finally recovering from the profound impact of the recessionary conditions, particularly early in the year. Sales margin loss consistently improved on a sequential basis throughout the year and the outlook is getting brighter for 2010. Coal prices are rising as China is consuming a lot of met coal. Co expects continued stabilization of the macroeconomic environment throughout 2010 and corresponding improvements for steelmaking raw material demand.
Thanks to this bullish earnings report, Cliff has received plenty of upgrades and upward earnings revisions. FBR raised their price target to $81 due to the higher iron ore and met coal prices. Deutsche Bank raised their target to $85 from $65 due to the increasing potential for higher-than-expected annual iron ore settlements and Cliffs' transition to global diversified miner status. JP Morgan raises their target to $83 from $60 to reflect higher iron ore. With the higher earnings estimates Cliffs trades for 12 times this years earnings and 9 times next years earnings. Earnings estimates for next year have risen 60% just in the last three months. The stock also trades for 2 times sales and three times book value. As mentioned, Cliff Natural Resources is not a conservative investment. Earnings are extremely volatile, but currently everyting is pointing in the right direction for the company.