Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Most Undervalued Companies for the Defensive Investor – AugustÂ 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Cliffs Natural Resources Inc. (CLF)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Cliffs Natural Resources Inc. is a mining and natural resources company. The Company is a supplier of iron ore pellets to the North American steel industry from its mines and pellet plants located in Michigan and Minnesota. The Company also produces low-volatile metallurgical coal in the United States from its mines located in Alabama and West Virginia. In addition, it operates an iron ore mining complex in Western Australia and owns two non-operating iron ore mines in Eastern Canada. The Company operates in segments: U.S. Iron Ore, Asia Pacific Iron Ore and North American Coal. In the United States, it operates five iron ore mines in Michigan and Minnesota and two metallurgical coal operations located in Alabama and West Virginia. Its Asia Pacific operations consist of its Koolyanobbing iron ore mining complex in Western Australia.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is aÂ free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||Fail|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||-$204.82|
|MG Value based on 0% Growth||-$120.07|
|Market Implied Growth Rate||-4.36%|
|% of Intrinsic Value||N/A|
Cliffs Natural ResourcesÂ Inc.Â does not qualify for eitherÂ the Enterprising Investor orÂ the more conservative Defensive Investor. Â The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability or growthÂ over the last ten years, and the high PEmg and PB ratios. Â The Enterprising Investor is concerned with the level of debt relative to the net current assets as well as theÂ lack of earnings stability or growth over the last five years.Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods shouldÂ explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation,Â the company appears to be overvalued after seeingÂ itsÂ EPSmg (normalized earnings) decline from $6.96 in 2011 to an estimated loss of $14.13 for 2015. Â This level of earnings growth does not support a positive valuation, leadingÂ the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Cliffs Natural Resources Inc. (CLF)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$20.56|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$1,382,200,000|
|Total Current Liabilities||$758,400,000|
|Shares Outstanding (Diluted Average)||153,232,000|
Earnings Per Share History
|Next Fiscal Year Estimate||-$5.55|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||-$14.13|
Other ModernGraham posts about the company
|18 Companies to Research This Week â€“ 8/30/2014|
|Cliffs Natural Resources Inc. Annual Valuation â€“ 2014 $CLF|
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please read our more detailed disclaimer.