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Solid Markets Aid Commercial Metals Amid Coronavirus Scare

Zacks Equity Research
·6 mins read

On Apr 15, we issued an updated research report on Commercial Metals Company CMC. The company is poised to gain from robust key end markets, acquisitions and investments as well as the growing construction activities in the United States and Poland. However, concerns over the coronavirus outbreak are likely to weigh on steel prices, in turn denting the company’s margins.

Recently, the company reported second-quarter fiscal 2020 results. Adjusted earnings per share came in at 53 cents, beating the Zacks Consensus Estimate of 50 cents. The figure also surged 82.8% year over year. Commercial Metals delivered stellar fiscal second-quarter results aided by robust demand from construction markets in the United States and Poland.

Commercial Metals outpaced the Zacks Consensus Estimate in all of the trailing four quarters, the average positive surprise being 15.3%.

Operations Continue Amid Coronavirus Outbreak

Commercial Metals has not issued any guidance for fiscal 2020 due to the economic uncertainties on account of the coronavirus outbreak. The company is also considering potential actions that local, state and federal governments might take in response to the outbreak. The company’s expanded domestic footprint enables it to serve customers continuously under the current unprecedented situation. Notably, Commercial Metals has not witnessed any operating or shipping disruption till date and its supply chain also remains intact.

Solid Steel & Rebar Demand Looks Good

Spending on construction activities in the United States and Eastern Europe continues to flare up, thanks to the spending on state and local highway projects. This will likely spur demand for long-product steel and rebar. Moreover, President Trump has proposed a $2-trillion infrastructure plan to stimulate the U.S. economy. This is likely to further fuel the company’s steel demand. Construction demand in Poland and the company’s investment in the country place it well for the days ahead. Rise in construction activities will also drive demand for the spooled rebar market. Additionally, a solid fabrication backlog and an upbeat rebar-margin environment will likely drive Commercial Metal’s performance in fiscal 2020.
 
Investment to Spur Growth

The company has completed the ramp-up of production volumes at its second micro mill in Durant, OK, with better-than-anticipated returns, supported by robust rebar demand and elevated metal margins. Furthermore, its optimization efforts and expanded domestic mill capacity will yield benefits in the days ahead. Also, 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. The company expects capital spending for fiscal 2020 between $160 million and $185 million.

Acquisition Bodes Well

On Nov 5, 2018, the company completed the acquisition of four U.S. rebar steel mills and 33 fabrication facilities from Gerdau S.A., a producer of long and specialty steel products in the Americas for a cash price of $600 million. The buyout added 2.5 million tons of rebar capacity as well as increased fabrication capacity by almost 50%. This gives Commercial Metals a dominant share in the U.S. rebar market. Additionally, the company will have an expanded geographic presence in the largest construction regions in the United States.

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. The company had a credit capacity of $617 million at the end of the fiscal second quarter, with cash in hand of $232 million. Commercial Metals’ strong liquidity, financial position and focus on reducing debt by a strategic capital-allocation approach poise it well to navigate through the current turbulent situation. In the fiscal second quarter, it reduced the outstanding debt by $35 million.

Few Headwinds to Counter

Lower Steel Prices to Hurt Commercial Metals’ 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 virus outbreak is likely to impact steel prices on concerns over the pandemic in the United States and worries over demand slowdown amid production shutdowns by automakers. This is likely to dent the company’s margins. This apart, the sluggish oil and gas markets are likely to affect its results as the company has direct sales exposure to these.

Rising Import Levels a Woe

Oversupply in the steel industry has been a perennial problem. Global steel-making capacity exceeds demand for steel products in some regions globally. Excessive imports of steel into the United States continue to exert downward pressure on U.S. steel prices. This affects Commercial Metal’s ability to increase sales, margins, and profitability. Moreover, metal margins in the International Mills segment is under pressure due to elevated import levels. The overhang of imported steel products in Europe is reducing, but remains a headwind to the segment’s margins.

Share Price Performance

Commercial Metals’ shares have depreciated 16.2% over the past year compared with the industry’s decline of 48%.



Zacks Rank & Key Picks

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

A few better-ranked stocks in the basic materials space are Novagold Resources Inc. NG, Franco-Nevada Corporation FNV and Barrick Gold GOLD, all currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Novagold has an expected earnings growth rate of 11.1% for fiscal 2020. The company’s shares have surged 147.8% in the past year.

Franco-Nevada has an anticipated earnings growth rate of 15.9% for the current year. Its shares have gained 63.7% over the past year.
  
Barrick has a projected earnings growth rate of 41.2% for 2020. The company’s shares have rallied 78.8% in the past year.

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Franco-Nevada Corporation (FNV) : Free Stock Analysis Report
 
Barrick Gold Corporation (GOLD) : Free Stock Analysis Report
 
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