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Here's Why You Should Hold Commercial Metals in Your Portfolio

Commercial Metals Company CMC is performing well driven by improving key end markets, rising scrap prices, and favorable macroeconomic and market conditions in both the United States and Poland. A positive trend in estimate revisions reflects optimism over the company’s prospects. Further, investors’ confidence has been buoyed by robust price performance and strong fundamentals.


An Outperformer



In the past year, Commercial Metals’ shares have fallen 5%, compared with the industry’s decline of 14%.


Favorable Zacks Rank, Score


Commercial Metals carries a Zacks Rank #3 (Hold). It has a VGM score of A. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1, 2 or 3 make solid investment choices.


Estimate Revisions


Estimates for Commercial Metals for both fiscal 2018 and fiscal 2019 have moved up 3% and 6%, respectively, over the past 30 days, reflecting the optimistic outlook of analysts. 


Upbeat Q4 Performance


Commercial Metals delivered adjusted net income of $60 million or 51 cents per share in the fourth quarter of fiscal 2018 (ended Aug 31, 2018), outpacing the Zacks Consensus Estimate of 43 cents. The figure also compared favorably with net income of $6.8 million or 6 cents recorded in the prior-year quarter. Net sales of $1,308 million for the fourth quarter rose 21% year over year, surpassing the Zacks Consensus Estimate of $1,291 million.


Growth Drivers


There have been improvement in farm equipment manufacturing activity, construction machinery and energy related spending. Additionally, spending in construction activity in the United States has grown 5% per year. Strong bidding activity has led to significant growth in the company’s backlog. Leading indicators of macroeconomic and market conditions in both the United States and Poland suggest continued economic growth and should translate into improved long product steel demand.


The company’s top-line is benefiting from the increase in global investment in infrastructure, spurred by improvement in the construction and energy sectors. This has led to an environment of increased pricing of raw materials, including scrap prices. This increase in scrap prices has favorably impacted quarter-over-quarter and year-over-year average selling prices in the company’s Americas Recycling, Americas Mills, and International Mill segments.


The Americas Mill segment will continue to gain from improving construction activity and lower imports. The Americas Recycling segment is gaining from strong demand for ferrous scrap, and an increasing price environment for both ferrous and non-ferrous material. In fiscal 2018, ferrous prices have increased approximately 19% while non-ferrous prices have risen 11%. The segment is poised well on the back of rising scrap prices. At the International Mill segment, strong market conditions will sustain in Poland which in turn will aid results. In Poland, steel consumption was a record 13.5 million metric tons in 2017, increasing for the fourth year in a row. Conducive markets in Poland and the company’s recent investment in the country poises it well for improved results in the future.


Headwinds to Counter in Q1


Commercial Metal anticipates some inflationary pressures on manufacturing costs owing to a tight labor market, consumable raw material prices and an extended planned outage in its Polish operations. This will likely inflate manufacturing costs by 3-5%, denting margins in the first quarter. Further, the first quarter is typically a slightly slower period for the company as construction work begins to wind down before the onset of winter months and the beginning of the holiday season. Further, the company lost shipping days in certain markets due to heavy rains in Texas, and impact of hurricanes Florence and Michael.


Stocks to Consider


Some better-ranked stocks in the sector include The Mosaic Company MOS, Ingevity Corporation NGVT and CF Industries Holdings, Inc. CF. While The Mosaic Company flaunts a Zacks Rank #1 (Strong Buy), Ingevity and CF Industries carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.


The Mosaic Company has expected long-term growth rate of 7%. Its shares have surged 51% in the past year.


Ingevity has expected long-term growth rate of 12%. Its shares have appreciated 23% over the past year.


CF Industries Holdings has an expected long-term growth rate of 6%. Its shares have gained 16% over the past year.


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