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Construction Demand Aids Commercial Metals Amid Pandemic

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On Sep 4, we issued an updated research report on Commercial Metals Company CMC. The company is poised to gain from solid construction and infrastructure activities in the United States and Poland. Moreover, strong fabrication backlogs, upbeat metal margins and the company’s investments in the expanding domestic mill network will aid growth. However, concerns over the coronavirus pandemic are likely to weigh on steel prices, in turn denting the company’s margins.

Commercial Metals has a trailing four-quarter average earnings surprise of 38.91%.

Solid Construction Demand Bodes Well

Commercial Metals expects strong construction and infrastructure activity in the fiscal fourth quarter. Spending in construction activity in the United States is strong as U.S. business is driven by pre-funded long-term construction projects. This will translate into rebar demand and improved long product steel demand, which bodes well for Commercial Metals. Moreover, the Trump administration’s $1-trillion infrastructure plan to stimulate the U.S. economy is likely to further fuel the company’s steel demand. The company continues to expand its market share in the United States and Poland while reducing operating costs. Robust construction demand in Poland and the company’s investment in the country poise it well for improved results in the future.

Strong Fabrication Backlog to Aid Margin

The company is poised to gain from robust fabrication backlogs, solid bidding activity as well as upbeat metal margins, supported by the current rebar prices. Fabrication margins are anticipated to be strong on solid backlog pricing and easing of input costs. Moreover, the company’s International mill performance is expected to be relatively stable in the fiscal fourth quarter.

Investments to Spur Growth

Commercial Metals expects capital spending for fiscal 2020 to be between $155 and $170 million. It has completed the ramp-up of production volumes at second micro mill in Durant, OK with better-than-expected returns, supported by strong rebar demand and higher metal margins. Furthermore, the company’s optimization efforts and expanded domestic mill network will yield benefits in the days ahead. In sync with this, Commercial Metals closed the Rancho Cucamonga, CA melting operations. This move will lower the cost of finished rebar from Rancho, while supporting utilization rates at other mills.

Capital-Allocation Move to Boost Growth

The company exited the International Marketing and Distribution business, and plans to utilize the proceeds to strengthen its balance sheet as well as invest in core steel manufacturing segments. Commercial Metals had a credit capacity of $604.2 million at the end of the fiscal third quarter, with cash in hand of $462 million. Its strong liquidity, financial position and focus on reducing debt by a strategic capital-allocation approach poise it well to sail through the current turbulent situation.

Lower Steel Prices to Dent Margins

The coronavirus pandemic has dampened recovery in the U.S. steel industry, which bore the brunt of a sharp decline in domestic steel prices and damaging impacts of the trade war last year. The pandemic has impacted steel demand across major markets such as construction and automotive. This is likely to dent the company’s margins. Apart from this, excessive imports of steel into the United States keep exerting downward pressure on U.S. steel prices. A significant rebound in U.S. steel prices is not expected in the near term given the current muted demand environment.

Share Price Performance

Commercial Metals’ shares have appreciated 25.6% over the past year, as against the industry’s decline of 9.5%.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the basic materials space include Kinross Gold Corporation KGC, Eldorado Gold Corporation EGO and Yamana Gold Inc. AUY, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Kinross has an expected earnings growth rate of 100% for the current year. The company’s shares have surged 71.7% over the past year.

Eldorado Gold has an anticipated earnings growth rate of 2.33% for the ongoing year. Its shares have rallied 14.5% in the past year.

Yamana has an estimated earnings growth rate of 76.9% for 2020. The company’s shares have soared 73.6% in the past year.

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