Free Annual Reports
Cliffs' Soaring Profits Not Enough
Cliffs Natural Resources (NYSE:CLF), known mostly for its iron ore mining operations, turned in a second quarter that saw both revenue and earnings jump by more than 50 percent. But it failed to beat estimate, as expectations for the quarter had been much higher. The market drove the stock down almost 6 percent in after-hours trading immediately after the report.
TUTORIAL: World's Greatest Investors
Steep Profits and Revenue Increases
Q2 earnings per share (EPS) had been expected to come in at $3.71, but instead Cliffs earned $2.92 per share on net income of $408 million. Last year's Q2 EPS was $1.92 on net income of $261 million. The rise in earnings was 56.4 percent, while revenue increased 52 percent to $1.81 billion from $1.18 billion in the same quarter last year. Higher pricing in Cliffs' iron ore business segment, plus the additional sales from its recent acquisition, Bloom Lake operations in Eastern Canada, were strong contributing factors. (For related reading, see Investing In The Metals Markets.)
Costs and Expectations
The cost of goods sold and operating expenses rose by 40 percent year over year, while other costs added an additional $114 million in the quarter. Cliffs' acquisition of Consolidated Thompson added $18 million of these costs. While these items no doubt raised concerns reflected in the market's reaction to the stock's report, the sell-off was likely exacerbated by the general market atmosphere over the debt ceiling drama. Investors will note that year over year, Cliffs also has had double-digit revenue growth the past five quarters. Gross margins have also expanded the past five quarters, with the average growth per quarter more than 20 percent. The company also maintained its outlook that - given steel production in the U.S. and Europe, as well as the ongoing growth in China's steel industry - demand would remain steady throughout the rest of the year. (For related reading, see A Look At Corporate Profit Margins.)
The Fundamental Question
Despite the spookiness of the whole Washington melodrama, which is not to downplay its seriousness, it's hard to see how that is going to dissuade China, for example, from investing in its steel industry. That, of course, means China needs iron ore. While the U.S. steel industry has been slow to rebound, it has certainly been showing signs of life, as in U.S. Steel's just-reported profitable results. Anything in the U.S. domestic economy would seem more threatened by potential consequences of a worst-case outcome in Washington, which would include a downgrade. It's natural to be concerned about U.S.-based stocks, including Cliffs, which does much of its business domestically, but the concerns for Cliffs' business prospects seem excessive.
Fundamental and long-term investors should keep the context for the steelmakers and the iron ore industry, including Cliffs. Brazil-based Vale (NYSE:VALE) has a global reach beyond China. So, too, do BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO). Steelmakers such as U.S. Steel and Nucor (NYSE:NUE) are rebounding from the trough of the recession, even while the market remains skeptical, but the iron ore miners have been selling higher-priced raw materials.
Bottom Line
Indeed, the revenue Cliffs is expecting on its U.S. iron ore for this year is still based on a sale price of $130 to $135 per ton, compared to less than $100 per ton last year at this time. While it's true that Cliffs expects some cost increases for SG&A and other areas for the remainder of the year, its ore price remains relatively high, its costs should be contained, and demand looks steady. Investors may pay more attention to Cliffs' bright prospects when the dim economic news of the day begins to fade. (For more on SG&A, see Understanding The Income Statement.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: World's Greatest Investors
Steep Profits and Revenue Increases
Q2 earnings per share (EPS) had been expected to come in at $3.71, but instead Cliffs earned $2.92 per share on net income of $408 million. Last year's Q2 EPS was $1.92 on net income of $261 million. The rise in earnings was 56.4 percent, while revenue increased 52 percent to $1.81 billion from $1.18 billion in the same quarter last year. Higher pricing in Cliffs' iron ore business segment, plus the additional sales from its recent acquisition, Bloom Lake operations in Eastern Canada, were strong contributing factors. (For related reading, see Investing In The Metals Markets.)
Costs and Expectations
The cost of goods sold and operating expenses rose by 40 percent year over year, while other costs added an additional $114 million in the quarter. Cliffs' acquisition of Consolidated Thompson added $18 million of these costs. While these items no doubt raised concerns reflected in the market's reaction to the stock's report, the sell-off was likely exacerbated by the general market atmosphere over the debt ceiling drama. Investors will note that year over year, Cliffs also has had double-digit revenue growth the past five quarters. Gross margins have also expanded the past five quarters, with the average growth per quarter more than 20 percent. The company also maintained its outlook that - given steel production in the U.S. and Europe, as well as the ongoing growth in China's steel industry - demand would remain steady throughout the rest of the year. (For related reading, see A Look At Corporate Profit Margins.)
Despite the spookiness of the whole Washington melodrama, which is not to downplay its seriousness, it's hard to see how that is going to dissuade China, for example, from investing in its steel industry. That, of course, means China needs iron ore. While the U.S. steel industry has been slow to rebound, it has certainly been showing signs of life, as in U.S. Steel's just-reported profitable results. Anything in the U.S. domestic economy would seem more threatened by potential consequences of a worst-case outcome in Washington, which would include a downgrade. It's natural to be concerned about U.S.-based stocks, including Cliffs, which does much of its business domestically, but the concerns for Cliffs' business prospects seem excessive.
Fundamental and long-term investors should keep the context for the steelmakers and the iron ore industry, including Cliffs. Brazil-based Vale (NYSE:VALE) has a global reach beyond China. So, too, do BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO). Steelmakers such as U.S. Steel and Nucor (NYSE:NUE) are rebounding from the trough of the recession, even while the market remains skeptical, but the iron ore miners have been selling higher-priced raw materials.
Bottom Line
Indeed, the revenue Cliffs is expecting on its U.S. iron ore for this year is still based on a sale price of $130 to $135 per ton, compared to less than $100 per ton last year at this time. While it's true that Cliffs expects some cost increases for SG&A and other areas for the remainder of the year, its ore price remains relatively high, its costs should be contained, and demand looks steady. Investors may pay more attention to Cliffs' bright prospects when the dim economic news of the day begins to fade. (For more on SG&A, see Understanding The Income Statement.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Free Annual Reports
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=1677fb9e4d72c605cb706789592a0299
