Suppose China’s Economy Doesn’t Collapse: Beaten-Up Shares of Cliffs Natural Would Rally

Will China’s long economic boom now be followed by a long, painful bust? The doomsayers argue China is heading towards a Japan-like lost decade. If they’re right, that could spoil demand for basic materials ranging from cardboard to zinc. The letup in Chinese demand for iron ore, to take one very narrow example, is being blamed for softness in that market:

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts

So given the weakness in iron ore prices, just how great a bargain is Cliffs Natural Resources (CLF)?

Cliffs got 89% of its revenues last year from the sale of iron ore it pulled form its mines in North America and Asia. (Its coal-mining operations account for just 7.5% of its revenues.) Many investors have abandoned Cliffs shares, which have tumbled from a high of $100 last year to a recent $45, on the assumption that if iron ore is getting cheaper, Cliffs stock is worth less—a lot less—too.

CLF Chart

CLF data by YCharts

They’re too pessimistic. Cliffs can weather lower iron ore prices, just like it did during the global economic meltdown back in 2008. If you don’t buy into the idea of a major China meltdown and a massive falloff in basic commodity prices, Cliffs offers a very cheap way to bet against the doomsayers—and get paid a nice dividend yield while you wait to see how your wager pays off.

Cliffs earned a solid $1.6 billion on $6.8 billion in revenue last year.

Its debts, while significant, are not overwhelming. Its debt-to-equity ratio is lower than that of other mining stocks, such as Consol Energy (CNX), Peabody Energy (BTU) and Cloud Peak Energy (CLD).

CLF Debt to Equity Ratio Chart

CLF Debt to Equity Ratio data by YCharts

The company’s stock is a component of the S&P 500. But Cliffs shares have one of the lowest PE ratios of any stock in that index. The average S&P 500 stock is trading at 16 times earnings. Cliffs stock is trading at 4.5 times the $9.89 it has earned in the trailing 12 months and 7 times the amount it is projected to earn in 2012. In fact, Cliffs’ PE ratio is significantly lower than other mining stocks’, such as BHP Billiton (BHP) and Walter Energy (WLT).

CLF PE Ratio Chart

CLF PE Ratio data by YCharts

It sports a higher dividend yield than other mining stocks do, too:

CLF Dividend Yield Chart

CLF Dividend Yield data by YCharts

The low P/E ratio would be justified if Cliffs were heading back towards the small per-share earnings figures its investors endured before 2005.

CLF Earnings Per Share TTM Chart

CLF Earnings Per Share TTM data by YCharts

But the analysts who follow Cliffs don’t expect to see those very low per-share earnings again. The company has abandoned its old cyclical sales pattern and found ways to sustain more revenue growth for longer stretches in recent years. So analysts are projecting the company will haul in well more than $7 a share in 2012.

By the way, even if Cliffs misses those earnings expectations by a dollar or two per share, there’s enough cash flowing here to cover its $2.50-a-share dividend.

CLF Dividend Chart

CLF Dividend data by YCharts

Cliffs shares have a habit of retreating to these very low P/E ratios. The last time they did, in early 2009, the stock subsequently went on a tear.

CLF PE Ratio Chart

CLF PE Ratio data by YCharts

Cliffs is rated an attractive by our YCharts Pro serviced. If you’re patient, you can buy it and collect your dividends. When the global economy finds its footing and China goes back to building skyscrapers at a frenzied pace, Cliffs could very likely deliver you a windfall capital gain as well.

Stephane Fitch is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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