CMC - Commercial Metals: The Rising Star In A Dynamic Market

2023-07-19 14:51:19 ET

Summary

• Commercial Metals presents an excellent investment opportunity due to its low valuation compared to competitors, consistent favorable earnings revisions, and stock price resilience.
• CMC's P/E ratio is significantly lower than the industry average and it has exceeded earnings expectations for two consecutive quarters, suggesting potential for stock growth.
• Despite market downturns, CMC has demonstrated remarkable resilience, with its stock value increasing as the S&P 500 declined, indicating its immunity to market volatility.

Let's shine the spotlight on the Commercial Metals Company ( CMC ) and highlight the compelling reasons why it presents an investment opportunity. First, CMC stands out with its notably low valuation compared to its competitors. Second, despite the unpredictable nature of the market, the company has consistently achieved favorable earnings revisions. Third, CMC's stock price exhibited exceptional resilience in the face of challenging circumstances. Let’s dive deeper into each of these factors to uncover the secrets behind CMC's investment potential.

Business Overview: Leading the Steel Industry

Commercial Metals Company operates its steel enterprise in the United States, Poland, China, and other international markets. As the largest producer of rebar in the U.S., CMC plays a crucial role in supplying the necessary metal materials for constructing a wide range of structures, including commercial buildings, hospitals, convention centers, industrial plants, power plants, highways, bridges, arenas, stadiums, and dams. While there are concerns about potential declines in rebar consumption for residential and non-residential buildings, UBS counters this by projecting increased demand for infrastructure projects, which is expected to offset any losses. In fact, UBS has assigned a "Buy" rating to CMC, with a stock price target of $61.71 within the next year, indicating confidence in the company's growth prospects.

Moreover, CMC's recent opening of the Arizona 2 micro mill in Q2 has already shown promising results. Barbara R. Smith, Chairman of the Board and Chief Executive Officer, expresses optimism about the progress made in commissioning operations at the Arizona 2 project, "I am extremely encouraged by the progress we have made on our commissioning of operations at CMC's Arizona 2 project. Operations are starting at an ideal time to capitalize on growing construction activity related to the Infrastructure Investment and Jobs Act, re-shoring, and the Inflation Reduction Act." The Arizona 2 project, together with the Tensar platform, EDSCO Fasteners acquisition , and other strategic initiatives, will provide a significant source of earnings and cash flow growth.

Unveiling CMC's Valuation Story

One might question the modest B- rating given by Seeking Alpha regarding CMC's valuation. Do not be discouraged, however. This rating primarily stems from the fact that CMC only started offering dividends this year. 73% of their valuation metrics received an A- or higher, including P/E Non-GAAP ratio and Price / Cash Flow ((TTM)).

According to market analysts, the average P/E ratio in the Metals & Mining industry is 11.24. In contrast, CMC boasts an impressively lower P/E ratio of 7.14. When we compare CMC to industry competitors Worthington ( WOR ), Nucor (NUE), ATI ( ATI ), and Cleveland-Cliffs ( CLF ) we find that their P/E ratios are notably higher at 12.68, 9.25, 19.76, and 10.81 respectively. So what does this tell us? CMC not only operates in a rapidly growing industry but also emerges as an undervalued gem within its sector. As CMC continues to capture a larger share of the market, we can expect exciting stock growth.

Additionally, CMC surpasses the competition in important debt-to-cash flow ratios. Compared to the same companies, CMC boasts the lowest Total Debt to Equity ratio at 33.09% and the lowest Price/Cash Flow ((TTM)) at 4.63. These metrics indicate CMC's strong ability to meet short-term obligations with available assets. A closer examination of CMC's cash flows reveals promising trends as well. Over the last two quarters, cash flows from operations have surged by 101%, rising from $186.5 million to $375.8 million. Moreover, the company's cash flow from operations surpasses both cash flows from investing and financial activities, highlighting a healthy cash generation from core business operations.

A Close Examination of CMC's Earnings Revisions

Now, let’s focus on Seeking Alpha’s earnings analysis. CMC holds an A- rating for profitability. The numbers speak for themselves. From February 2023 to May 2023, CMC's gross profit increased from $396.2 million to $482.7 million. But there is more to this story. CMC did not merely surpass one quarterly earnings estimate; it exceeded expectations for two consecutive quarters.

Turning our attention to the anticipated earnings call scheduled for October 13, 2023, analysts have revised their estimates an impressive three times. This is exciting because when earnings revisions are scaled up to such a degree, they frequently trigger significant increases in stock prices. This correlation serves as a potent signal, suggesting an impending surge in the stock's value. Industry experts hold a firm belief that CMC is well-positioned to deliver a strong performance that exceeds expectations.

CMC's Resilience as a Cornerstone for Steady Growth

The market in the past year experienced a significant downturn, with the S&P 500 decreasing by 20% in 2022. Both endogenous factors such as high inflation and debt, as well as exogenous factors like the war in Ukraine, adversely affected the markets. During this period, however, CMC demonstrated remarkable resilience.

The graph below illustrates an intriguing relationship between CMC and the SP500 over the past two years. CMC and the S&P 500 exhibit an inverse correlation, with a coefficient of -0.44 (refer to the Python code for a more detailed analysis). This signifies that when the S&P 500 experienced a decline in value in 2022, CMC defied the odds and witnessed an increase in its own value. While CMC's stock rose by 32%, the Vanguard ETF ( VOO ) linked to the S&P, suffered a decline of 20%. CMC has consistently proven its immunity to market volatility, a testament to its strength and resilience.

Risk Factors

While CMC's future prospects appear promising, it's essential to consider potential risks. First, the commissioning of CMC's third and fourth micro mills, with the fourth mill expected in 2025, may present challenges that could impede the realization of anticipated benefits and result in short-term losses. Second, as a business operating in the metal industry, CMC is susceptible to supply chain delays and disruptions, which can impact its operations. Third, macroeconomic downturns in the U.S. and Central Europe could have adverse effects on CMC's revenue and cost structure. Lastly, the growing emphasis on environmental, social, and governance ((ESG)) matters, including related targets and initiatives, may lead to additional costs, risks, or negative impacts on CMC's business.

In my opinion, it's important to acknowledge that risks are inherent in any business. However, it's worth noting that CMC's third mill, Arizona 2, is currently operating efficiently, and I anticipate that the company will continue to experience strong gains. Moreover, the disruptions experienced in the supply chain industry during the post-coronavirus period have prompted companies like CMC to innovate and address supply chain issues proactively, mitigating potential challenges.

Concluding Remarks

CMC stands as a bright star in the investment landscape. After analyzing the data, it becomes clear that CMC has positioned itself as a force, displaying strength amidst market volatility and charting its own path to success. With a favorable valuation, strong earnings estimates, and a history of resilience, CMC possesses the key ingredients for a fruitful investment. Whether you decide to hold the stock for the long term or aim for immediate gains, CMC emerges as a compelling choice.

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