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Why Hold Strategy is Apt for Commercial Metals Stock Right Now

Zacks Equity Research

Commercial Metals Company CMC is poised to gain from robust key end markets, acquisitions and growth in the United States and Poland. However, cost inflation and higher interest expenses will likely strain margins in the near term.

Commercial Metals currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors.

Price Performance

Year to date, Commercial Metals’ shares have gained 22.6%, as against the industry’s decline of 8.2%.



Below, we briefly discuss the company’s growth drivers and possible headwinds.

Estimates Moving Up

Annual estimates for Commercial Metals’ earnings per share moved up in the past 30 days, reflecting analysts’ confidence in the stock. During this period, the Zacks Consensus Estimate for fiscal 2020 earnings per share moved 1.5% north to $2.06. The company has an estimated long-term earnings growth rate of 5.5%.

Mixed Q4 Results

Commercial Metals’ fourth-quarter fiscal 2019 adjusted earnings per share of 76 cents outpaced the Zacks Consensus Estimate of 70 cents. However, the top-line figure of $1,543 million lagged the Consensus mark of $1,569 million. Year over year, earnings and revenues were up 49% and 18%, respectively.
 
Cheap Valuation

Commercial Metals’ trailing 12-month EV/EBITDA ratio is 7.3, while the industry's average trailing 12-month EV/EBITDA is 7.9. Consequently, the stock is cheaper at this point based on the ratio.

Return on Assets (ROA)

Commercial Metals currently has a Return on Assets (ROA) of 6.6%, while the industry recorded ROA of 2.6%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

Return on Equity (ROE)

Commercial Metals’ trailing 12-month ROE of 16% reinforces its growth potential. The company’s ROE is higher than the ROE of 5.5% for the industry, highlighting its efficiency in utilizing shareholders’ funds.

Growth Drivers in Place

Spending in U.S. construction activity continues to flare up, which will further translate into improved long-product steel demand. Robust markets in Poland and Commercial Metal’s recent investment in the country fortify the company’s prospects. Moreover, solid fabrication backlog and upbeat rebar-margin environment are anticipated to aid Commercial Metal’s fiscal 2020 performance.

The company has completed the ramp-up of production volume at the second micro mill in Durant, OK, with higher-than-anticipated returns, supported by strong rebar demand and elevated metal margins. Also, it introduced a second spooler at the Arizona micro mill in the fiscal fourth quarter.

Commercial Metals has commenced construction on expanding the finished goods’ production capacity by approximately 400,000 metric tons at its Poland facility. The investment will enable the facility to fully utilize its existing melt capacity, and continue expansion into higher-margin wire rod and merchant products. The project will likely conclude by the end of fiscal 2020.

On Nov 5, 2018, the company completed the acquisition of certain U.S. rebar steel mills and 33 fabrication facilities from Gerdau S.A. The buyout added 2.5 million tons of rebar capacity as well as increased fabrication capacity by almost 50%. This gives a dominant share to Commercial Metals in the U.S. rebar market. Consequently, the company will have an expanded geographic presence in the nation’s largest construction region.

Hurdles to Counter

Inflationary pressure on manufacturing costs due to a tighter labor market and consumable raw-material prices will drag down the company’s margins. Furthermore, its debt to equity ratio has shot up, following the acquisition of certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. Higher debt levels and interest expenses, hence, are other concerns for Commercial Metals.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.

Stocks to Consider

A few better-ranked stocks in the Basic Materials space are Franco-Nevada Corporation FNV, Agnico Eagle Mines Limited AEM and Kinross Gold Corporation KGC. While Franco-Nevada and Agnico Eagle sports a Zacks Rank #1 at present, Kinross Gold carries a Zacks Rank #2.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Franco-Nevada has a projected earnings growth rate of 39.3% for the ongoing year. The company’s shares have rallied 47.6% in a year’s time.

Agnico Eagle has an outstanding estimated earnings growth rate of 168.6% for the current year. Its shares have appreciated 65.7% over the past year.

Kinross has an expected earnings growth rate of a whopping 210% for 2019. The company’s shares have surged 77.1% in the past year.

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