Cliffs Natural Resources Inc. Annual Valuation – 2014 $CLF

220px-Cliffs_Natural_Resources_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Cliffs Natural Resources Inc. (CLF) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Cliffs Natural Resources Inc. is an international mining and natural resources company. The Company is an iron ore producer and a producer of metallurgical coal. The Company’s operations are organized according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Ferroalloys, and its Global Exploration Group. The Company operates in four segments: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal and Asia Pacific Iron Ore. In the United States, it operates five iron ore mines in Michigan and Minnesota, five metallurgical coal mines located in West Virginia and Alabama and one thermal coal mine located in West Virginia. It also operates two iron ore mines in Eastern Canada that primarily provide iron ore to the seaborne market for Asian steel producers. On May 12, 2011, the Company completed the acquisition of Consolidated Thompson Iron Mining Limited.
CLF Chart

CLF data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price $15.81
MG Value $0.00
MG Opinion Overvalued
Value Based on 3% Growth $15.51
Value Based on 0% Growth $9.09
Market Implied Growth Rate 3.14%
Net Current Asset Value (NCAV) -$35.32
PEmg 14.78
Current Ratio 1.60
PB Ratio 0.40

Balance Sheet – 6/30/2014

Current Assets $1,663,800,000
Current Liabilities $1,037,500,000
Total Debt $3,293,000,000
Total Assets $13,102,400,000
Intangible Assets $0
Total Liabilities $7,074,800,000
Outstanding Shares 153,180,000

Earnings Per Share

2014 (estimate) -$0.88
2013 $2.36
2012 -$6.57
2011 $11.61
2010 $7.49
2009 $1.63
2008 $4.76
2007 $2.57
2006 $2.60
2005 $2.45
2004 $2.92

Earnings Per Share – ModernGraham

2014 (estimate) $1.07
2013 $2.46
2012 $2.94
2011 $7.00
2010 $4.40
2009 $2.84

Dividend History

CLF Dividend Chart

CLF Dividend data by YCharts


Cliffs Natural Resources does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has concerns with the low current ratio, and the lack of earnings stability or growth over the last ten years.  The Enterprising Investor has similar concerns with the high level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $4.40 in 2010 to an estimated $1.07 for 2014.  This demonstrated drop in earnings clearly does not support the market’s implied estimate of 3.14% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Cliffs Natural Resources (CLF)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author held a long position in Cliffs Natural Resources (CLF) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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