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Commercial Metals Bets on Favorable Markets Amid Higher Costs

Zacks Equity Research

On Jun 25, we issued an updated research report on Commercial Metals Company CMC. The company is poised to gain from favorable key markets, acquisitions and growth in the United States and Poland. However, cost inflation and higher interest expenses will likely constrain margins in the near term.

Stellar Top- and Bottom-Line Results in Q3

Commercial Metals delivered adjusted earnings per share of 67 cents in the third quarter of fiscal 2019 (ended May 31, 2019), a whopping 64% jump year over year. The bottom-line figure also comfortably surpassed the Zacks Consensus Estimate of 63 cents. Net sales for the quarter climbed 33% year over year to $1,606 million, backed by execution of various growth strategies and solid fundamentals in core markets. Significantly, strength in construction activity, solid industrial production, acquisition of the Oklahoma facility and introduction of hot-spooled rebar contributed to the impressive performance during the May-end quarter.

Strong Economic Growth & Steel Demand Poise Well

Commercial Metals has witnessed improvement in farm equipment manufacturing activity, construction machinery and energy related spending. Additionally, spending in construction activity in the United States continues to grow. Leading indicators of macroeconomic and market conditions in both the United States and Poland suggest economic growth and will translate into improved long-product steel demand. Conducive markets in Poland and the company’s recent investment in the country poise it well for improved results in the future.

Focus on Investment to Spur Growth

Capital expenditures were $91.8 million during the first nine months of fiscal 2019, while capital spending for the current fiscal is likely to be in the $150-$175 million range. The company has completed the ramp-up of production volumes at its micro mill in Durant, OK, with better-than-expected returns, supported by strong rebar demand and elevated metal margins.
 
Construction is well on track at the Arizona micro mill where the company has invested in a second spooler to produce hot spooled rebar. The facility will likely start producing spooled material during the fourth quarter of fiscal 2019. Commercial Metals has also commenced construction on expanding the finished goods production capacity by approximately 400,000 metric tons at its Polish facility. The investment will allow the facility to fully utilize the existing melt capacity, and continue expansion into higher-margin wire rod and merchant product.
 
Strategic Acquisition Bodes Well

On Nov 5, 2018, the company completed the acquisition of certain U.S. rebar steel mill and fabrication assets from Gerdau S.A., a producer of long and specialty steel products in the Americas. In the fiscal third quarter, the acquired assets added $453.5 million to the company’s revenues and $56.6 million to its operating income.

Hence, with dominant shares in the U.S. rebar market, the buyout will add more than 2 million tons of rebar capacity, as well as approximately 800,000 tons of fabricated steel capacity. Additionally, the company will have an expanded geographic presence in the largest construction regions in the United States. This buyout is anticipated to be accretive to earnings and cash flow within the first year of transaction.
 
Few Hurdles Remain

Inflationary pressure on manufacturing costs owing to a tight labor market and consumable raw material prices will dent the company’s margins. Furthermore, its debt to equity ratio has shot up, in order to fund the acquisition of certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. Consequently, higher debt levels and interest expense are other concerns for Commercial Metals. 

Commercial Metals Company Price and Consensus

Commercial Metals Company Price and Consensus

Commercial Metals Company price-consensus-chart | Commercial Metals Company Quote

Zacks Rank & Stocks to Consider

Commercial Metals currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Basic Materials space are Materion Corporation MTRN, Flexible Solutions International Inc FSI and AngloGold Ashanti Limited AU, all currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Materion has an expected earnings growth rate of 27.3% for 2019. The company’s shares have gained 22.7% in the past year.

Flexible Solutions has an outstanding projected earnings growth rate of 342.9% for the current year. The company’s shares have soared 158.9% in a year’s time.

AngloGold has an estimated earnings growth rate of 90.6% for the ongoing year. Its shares have surged 117.7% in the past year.

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