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Commercial Metals Gains From Robust Markets Amid Cost Woes

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On Sep 18, we issued an updated research report on Commercial Metals Company (CMC - Free Report) . The company 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.

Solid Steel Demand Looks Good

Spending in construction activity in the United States continues to flare up, which will translate into improved long-product steel demand. Conducive markets in Poland and Commercial Metal’s recent investment in the country poise it well for improved results.

Investment to Spur Growth

The company has completed the ramp-up of production volumes at its micro mill in Durant, OK, with better-than-anticipated returns, supported by robust rebar demand and elevated metal margins. Construction is well on track in the Arizona micro mill, where the company has invested in a second spooler to produce hot spooled rebar. This facility will likely start producing spooled material during the fourth quarter of fiscal 2019.
Commercial Metals has also started construction on expanding the finished goods’ production capacity by approximately 400,000 metric tons at its Polish facility. This will enable the facility to fully utilize the existing melt capacity, and continue expansion into higher-margin wire rod and merchant product. The project is likely to be completed by the end of fiscal 2020.
Strategic Acquisition Bodes Well

On Nov 5, 2018, the company completed the acquisition of certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. Hence, with dominant shares in the U.S. rebar market, this buyout will add more than 2 million tons of rebar capacity, as well as approximately 800,000 tons of fabricated steel capacity.

Additionally, the company will have an expanded geographic presence in the largest construction regions in the United States. This acquisition is anticipated to be accretive to earnings and cash flow within the first year of transaction.

Hurdles to Counter

Inflationary pressure on manufacturing costs due to a tight labor market and consumable raw material prices will dent 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. Consequently, higher debt levels and interest expense are other concerns for Commercial Metals.

Commercial Metals Company Price and Consensus

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the basic materials space are Kinross Gold Corporation (KGC - Free Report) , Alamos Gold Inc (AGI - Free Report) and Arconic Inc (ARNC - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kinross has an outstanding expected earnings growth rate of 155.7% for 2019. The company’s shares have surged 63.4% in the past year.

Alamos Gold has a projected earnings growth rate of a whopping 324% for the current year. The company’s shares have rallied 42.7% in a year’s time.

Arconic has an estimated earnings growth rate of 50% for the ongoing year. Its shares have gained 18.3% over the past year.

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