2024-01-02 04:58:17 ET
Summary
- Commercial Metals Company presents a geographically diversified business model with a focus on sustainable principles and recycling metals.
- The company has reported better-than-expected revenue figures and has a history of exceeding expectations in both EPS and revenue reports.
- The company's long-term outlook includes investments in low to moderate interest rate-sensitive end markets, such as highways, public utilities, healthcare, and educational infrastructure.
Commercial Metals Company (CMC) was recently presented with a lot of new projects like highways, or public utilities that are not subject to significant changes due to changes in the interest rates. CMC also continues to report lower net leverage, and executed several acquisitions in 2023, which may bring FCF growth in the coming future. In addition, given the previous history of better-than-expected revenue, CMC could surprise in the coming quarters. I did find some risks from competitors, failed acquisitions, or changes in environmental regulations. However, the company does trade quite cheaply.
Commercial Metal Company Presents A Geographically Diversified Business Model
Founded in 1915 in Dallas, Texas, Commercial Metal Company has an extensive manufacturing network located primarily in the United States and Central Europe.
CMC solutions support construction in a wide variety of applications including infrastructure, non-residential, residential, industrial, and power generation and transmission. The main end markets are the construction and manufacturing industries and metal service centers. Its business model has been strategically built on sustainable principles, including recycling metals, manufacturing products from approximately 98% recycled material using energy-efficient technology, and employing closed-loop water recycling processes.
The company has two reportable segments called North America and Europe. The first segment offers a wide variety of products to support the construction sector. Additionally, it provides construction-related solutions to serve markets complementary to those served in its vertically integrated operations. CMC has invested approximately 90%, 92%, and 73% of total capital expenditure in its North America segment during 2023, 2022, and 2021 respectively. It has its own fleet of trucks for logistics use and has 43 scrap metal recycling facilities located mainly in the southeast and central United States. Its steelmaking operations consist of six electric arc furnace mini steel mills, three EAF micro steel mills, and one rerolling steel mill.
Additionally, CMC Impact Metals operations manufacture high-strength steel products. Manufacturing operations include facilities engaged in general reinforcing steel manufacturing and the remaining four manufacturing steel fence posts. The products offered are marketed under the brands Galvaba, ChromX, and CryoSteel among others. This segment also has facilities that provide construction-related solutions through companies such as Tensar, which sells geogrids, and Geopier foundation systems.
The Europe segment consists primarily of a vertically integrated network featuring metallurgical scrap recycling facilities, a mini steel mill with EAF and manufacturing operations located in Poland, and facilities providing construction-related solutions. Its mini-mill sells steel products mainly to manufacturers, distributors, and construction companies. Its customers are mostly located in Poland. It also exports its products to the Czech Republic, Germany, Hungary, Slovakia, and other countries. Its manufacturing operations consist of five steel manufacturing facilities located in Poland, offering finished products for the Polish market as well as exporting to the Czech Republic and Germany.
Better Revenue Figures Than Expected, And A History Of Better Net Sales Than Expected
CMC did not report better than expected EPS GAAP earnings in the last quarter, however, quarterly revenue was overall better than expected. EPS GAAP was close to $1.56 with quarterly revenue of $2.21 billion. Recent EPS revisions in the last 90 days included declines. However, Commercial Metal Company has a history of better-than-expected EPS and revenue reports.
Source: SA Source: SA
Market analysts are also expecting good results for 2024 and 2025. 2025 net sales would be close to $8.211 billion, with 2025 EBITDA of about $1.047 billion, 2025 EBIT worth $785 million, and operating margin close to 9.56%. Finally, 2025 net income would stand at close to $568 million, with a net margin of 6.91% and 2025 free cash flow worth $308 million.
Source: Market Screener
Long-Term Outlook Includes Investments In End Markets Offering Low To Moderate Interest Rate Sensitivity
Commercial Metal Company offers a significant amount of exposure to public infrastructure projects, such as highways, and private projects like educational infrastructure. These projects among others in which CMC gets involved do not have a lot of exposure to changes in the interest rates. Given the current changes in the interest rates, I believe that CMC could receive significant demand for the stock.
Source: Investment Presentation
If Commercial Metal Company Continues To Lower Its Net Debt/EBITDA Figures, I Would Expect An Increase In The EV/FCF Ratio
CMC saw a decline in its net debt/EBITDA figure from around 3.5x-4x in 2018 to less than 0.4x in 2023. As more investors learn about the recent decrease in leverage, and the leverage ratio continues to go down, I believe that we could see further increases in the stock valuation and the EV/FCF.
Source: Investment Presentation
With regard to the current amount of leverage, I also believe that Commercial Metal Company currently has a significant amount of financial freedom to develop new projects.
Recent Acquisitions And Recent Increase In Assets Will Most Likely Lead To Stock Price Increases
In 2023, CMC acquired all assets of Roane Metals Group, LLC, completed the acquisition of Tendon Systems, LLC, all assets of BOSTD America, LLC, and EDSCO Fasteners, LLC. With the acquisition of a geogrid manufacturing facility in Oklahoma and four manufacturing facilities located in North Carolina, Tennessee, Texas, and Utah, I believe that we may see an increase in capacity in 2024. As a result, net sales growth could increase. The most recent acquisitions were explained with the following terms in the last annual report.
On May 1, 2023, we completed the acquisition of all of the assets of BOSTD America, LLC, a geogrid manufacturing facility located in Blackwell, Oklahoma. Prior to the acquisition, BOSTD produced several product lines for our Tensar operations under a contract manufacturing arrangement.
On July 12, 2023, we completed the acquisition of EDSCO Fasteners, LLC, a leading provider of anchoring solutions for the electrical transmission market, with four manufacturing facilities located in North Carolina, Tennessee, Texas and Utah. Source: 10-k
Given the previous acquisitions and the expertise accumulated in the M&A markets, I believe that we can expect further acquisition of companies. The impressive asset growth reported right after the year 2020 is also worth noting. From close to $4 billion, the total amount of assets increased to more than $6 billion.
Source: Ycharts
Assessment Of The Average Interest Rate Paid And EV/FCF Valuation
Commercial Metal Company reported a number of notes, bonds, and finance leases. Most of them included a weighted average interest rate between 4.1% and 4.9%. With these figures, I believe that assuming a WACC between 4% and 5.25% would be conservative.
In the past, the company traded between 5x and 12x FCF, but also lower. However, the sector median EV/EBITDA stands at close to 9x-8x, and the price/cash flow is close to 8.5x. With these figures, I assumed that the exit multiple could be close to 6x-14x.
Source: Ycharts Source: SA Source: SA
Balance Sheet
In the last quarterly report, the company noted cash and cash equivalents worth $592 million, with accounts receivable of about $1240 million, inventories worth $1035 million, and prepaid and other current assets worth $276 million. Total current assets stand at about $3.144 billion, and the current ratio is larger than 1x, so I do not see a liquidity problem here.
Buildings and improvements stand at about $1.071 billion, with equipment close to $3.089 billion, construction in process worth $213 million, and total property, plant, and equipment of about $2409 million. Total assets stood at close to $6.639 billion with an asset/liability ratio close to 2x.
Source: 10-Q
Accounts payable stands at close to $364 million, with accrued expenses and other payables of about $438 million, current maturities of long-term debt and short-term borrowings worth $40 million, and total current liabilities of $843 million. Finally, with a long-term debt of about $1.114 billion, total liabilities were equal to $2.517 billion.
Source: 10-Q
My Cash Flow Expectations, And DCF Model With My Previous Assumptions And Previous Cash Flow Statements
My expectations include 2031 net earnings of close to $399 million, with 2031 depreciation and amortization of about $447 million, stock-based compensation of close to $134 million, and deferred income taxes and other long-term taxes of about $315 million. Note that I did not include a write-down of inventory, asset impairments, or net loss on sales of assets because I believe that they are do not recurring events.
Additionally, with changes in accounts receivable of close to $46 million, changes in inventories of $547 million, and changes in accounts payable, accrued expenses, and other payables of close to -$498 million, I obtained 2031 CFO of close to $1.384 billion. Finally, if we also include capital expenditures of about -$453 million, 2031 FCF would be close to $932 million.
Source: My Cash Flow Expectations
Considering FCF between $932 million and $252 million from 2023 to 2031, a WACC of about 4% and 5.25%, and EV/FCF between 6x and 14x, I obtained an implied market capitalization of $6.8-$12 billion.
Source: My Cash Flow Expectations
With the previous results, if we also include a share count of 117 million, the implied fair price would be close to $59 and $110 per share with a median price of $70-$97. The internal rate of return would be between 2% and 15% with a median IRR of 5%-11%. I do believe that other analysts may obtain different results, however, in my view, most of them would conclude that Commercial Metal Company trades are a bit undervalued.
Source: My Cash Flow Expectations Source: My Cash Flow Expectations
Competitors, And Risks
Recycling operations in North America compete with scrap metal processors and primary producers of nonferrous metals. In relation to the manufacture of products, national and international competitors in the United States include local, regional, national, and international steel manufacturers and suppliers. Recycling facilities in Europe operate to provide raw materials almost exclusively to its mini steel mill in Poland. The global steel industry is cyclical and highly competitive. Global steel production capacity greatly exceeds demand for steel products in some regions of the world, which results in competition from steel imports in the regions in which CMC operates. I also believe that its global strategy and its distinctive customer service allow it to avoid the risks derived from overproduction.
The company relies heavily on the availability of large quantities of electricity and natural gas, and any disruption in delivery or substantial increase in energy costs could impact its business.
On the other hand, it is exposed to economic vulnerability in the regions in which its operations are concentrated. In this sense, it is highlighted that the events of the Russia-Ukraine war have negatively affected the company, and could continue to do so. Finally, possible changes in regulations related to climate change could affect its business model.
Conclusion
Commercial Metal Company brings exposure to projects that may not suffer from changes in the interest rate. Management recently acquired several targets, and with low net leverage, I believe that we could expect more acquisitions. Also, given the previous history of better-than-expected revenue, I believe that CMC is a stock to follow carefully. Yes, I did see some risks from failed acquisitions, changes in environmental regulations, and competition forces. With that, I think that the stock is significantly undervalued.
For further details see:
Commercial Metals: Acquisitions, Resistant To Interest Rate Changes, And Cheap