The Rising Influence of Rising Affluence

[DewDiligence]

ML downgrades CLF to neutral based on 2013 expected iron-ore price of $120/tonne (vs prior expectation of $140/tonne):

#msg-76119775

Discussion: ML’s new price target is $60 (down from the prior target of $84) based on ML’s expectation of 2013 EPS of $6.20. Note that CLF had 2011 EPS of $11.48 (#msg-72282856) and 1Q12 EPS of $2.63 (#msg-75223487), which is an annualized rate of more than $10.50 insofar as the first calendar quarter is seasonally CLF’s weakest period when Great Lakes ports are frozen.

In other words, ML is expecting a very sharp reduction in CLF’s 2013 EPS relative to 2011 and 2012 to date. Moreover, even if ML’s 2013 EPS forecast of $6.30 were to come true, the current share price of $50 is only 8x ML’s 2013 EPS forecast.

Let’s also bear in mind that CLF recently raised its dividend substantially (#msg-73237761, #msg-73261185) and that insiders have been buying shares on the open market (#msg-75995329). Thus, it’s reasonable to surmise that CLF’s insiders do not fully concur with ML’s view on the iron-ore market and the company’s business prospects.