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Commercial Metals Bets on Favorable Markets Amid Higher Costs

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On Apr 15, we issued an updated research report on Commercial Metals Company (CMC - Free Report) . The company is poised to gain from favorable key markets, acquisitions and growth in the United States and Poland. However, its results may be affected by cost inflation and higher debt.
 
Commercial Metals delivered adjusted earnings per share of 29 cents in the second quarter of fiscal 2019 (ended Feb 28, 2019), up 13% year over year. Earnings also surpassed the Zacks Consensus Estimate of 25 cents. Net sales in the quarter rose 33% year over year to $1,403 million, but missed the Zacks Consensus Estimate of $1,463 million.

Higher Steel Demand & Favorable Markets Bode Well

Continued strength in global demand for steel has led to increased margins across the company’s segments. Additionally, spending in construction activity in the United States continues to rise. Market conditions in the United States and Poland suggest continued economic growth, which is expected to translate into improved long-product steel demand.
 
Investments Support Commercial Metals

The ramp-up of production volumes at the micro mill in Durant, OK, is progressing well. The facility had increased shipments during the quarter. It is generating higher-than-expected returns aided by the strong rebar demand and improved 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 started 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 its expansion into higher-margin wire rod and merchant product. The project is likely to close by the end of fiscal 2020.

U.S Asset Acquisition to Drive Growth

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 for a cash purchase price of $600 million. In the fiscal second quarter, the acquired assets added $383.6 million to the company’s revenues and $32.9 million to its operating income. The acquisition will add more than 2 million tons of rebar capacity, as well as approximately 800,000 tons of fabricated steel capacity. In addition, 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. Post acquisition, the company is on track to execute cost-reduction moves.
 
Cost Inflation & Higher Debt Woes

Inflationary pressure on manufacturing costs owing to a tight labor market and consumable raw material prices will dent the company’s margins. Furthermore, the company’s debt to equity ratio shot up, in order to fund the acquisition of certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. Thus, higher debt levels and interest expense remain concerns for Commercial Metals. Seasonal factors might also result in lower shipment rates at the company’s facilities in third-quarter fiscal 2019.

Commercial Metals Company Price and Consensus

Zacks Rank and Stocks to Consider

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

A few better-ranked stocks in the Basic Materials sector are Kirkland Lake Gold Ltd. (KL - Free Report) , Innospec Inc. (IOSP - Free Report) and Materion Corporation (MTRN - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirkland has an expected earnings growth rate of 46.3% for 2019. The company’s shares have surged 86.3%, over the past year.

Innospec has a projected earnings growth rate of 3.5% for the current year. The stock has appreciated 16% in a year’s time.

Materion has an estimated earnings growth rate of 12.6% for 2019. The company’s shares have gained 7.7% in the past year.

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