Commercial Metals Company (CMC), the manufacturer and recycler of steel and metal products, is set to unveil fourth-quarter and full-year fiscal 2023 earnings results on October 12, 2023, before the market opens. Analysts expect the company’s revenue to decline 8.7% year-over-year to $2.20 for the quarter that ended August 2023.

In addition, the consensus EPS estimate of $1.82 for the to-be-reported quarter indicates a 25.7% decrease over the prior year’s quarter. For the fiscal year 2023, CMC’s revenue and EPS are expected to decline 1.6% and 7.4% from the previous year to $8.77 billion and $7.59, respectively.

This consensus outlook provides a decent sense of the company’s earnings picture; however, how the actual results compare to these analyst estimates is the primary factor that would impact its stock price in the near term. Notably, CMC has topped the consensus revenue and EPS estimates in each of the trailing four quarters.

While CMC reported third-quarter revenue of $2.34 billion, beating the analysts’ expectations of $2.24 billion, it fell 6.8% year-over-year. The company posted EPS of $2.02, above the consensus estimate of $1.82 but down 22.6% from the prior year’s period.

During the third quarter, demand for CMC’s finished steel products in North America remained healthy. The North America segment reported an adjusted EBITDA of $402.20 million for the quarter, an increase of 6% year-over-year. Also, demand from industrial end markets was stable on both a sequential and year-over-year basis.

However, Europe’s end market conditions softened during the quarter as Polish construction activity declined and industrial production across Central Europe remained muted. The Europe segment reported an adjusted EBITDA of $9.60 million, compared to $121 million in the prior year’s quarter.

According to Barbara R. Smith, Chairman of the Board and CEO, North America finished steel product shipments during the fourth quarter are expected to be consistent with the last reported quarter, backed by healthy end market demand and its historically high downstream backlog.

Further, results in the company’s Europe segment are anticipated to be relatively unchanged from the third quarter, reflecting continued economic uncertainty. “CMC will leverage its market leading cost position to maintain profitability in Europe within this challenging backdrop,” Ms. Smith added.

Despite instability in earnings, CMC paid a quarterly dividend of $0.16 per share of the company common stock to stockholders on July 21, 2023, of record on July 3, 2023. This dividend marks the 235th consecutive quarterly payment by the company and represents a 14% increase from the dividend paid in July 2022.

Shares of CMC have gained 20.5% over the past year to close the last trading session at $48.06. However, the stock has plunged 10.7% over the past month.

Here’s what could influence CMC’s performance in the upcoming months:

Positive Latest Developments

On July 18, CMC announced that the West Virginia Department of Environmental Protection granted the company a permit to commence construction of its fourth technologically advanced micro mill.

“Receiving this permit is an important milestone in our Steel West Virginia micro mill project,” said Barbara Smith, CMC’s CEO. “With the permit in hand, and land purchase completed, we can now begin construction to achieve our targeted commissioning date in calendar 2025.”

On July 13, CMC acquired EDSCO Fasteners LLC, a leading provider of anchoring solutions for the electrical transmission sector, from MiddleGround Capital. EDSCO’s custom engineered line of anchor cages, bolts, and fasteners are manufactured from rebar and used mainly to secure high-voltage electrical transmission poles to concrete foundations.

This acquisition is expected to advance CMC’s leadership position in construction reinforcement and extend the company’s capabilities to new, growing applications.

Also, on May 1, CMC announced the acquisition of a geosynthetics manufacturing facility from BOSTD - America. The Blackwell, Oklahoma-based site produces Tensar Geogrid’s product lines under a contract arrangement. This acquisition might enhance CMC’s supply chain flexibility and set the stage for cost-effective capacity expansion in the future.

Deteriorating Financials  

CMC’s net sales increased 6.8% year-over-year to $2.34 billion for the third quarter ended May 31, 2023. Its adjusted EBITDA declined 19.6% year-over-year to $374.08 million. Also, the company’s adjusted earnings were $239.70 million and $2.02 per share, compared to $320.20 million and $2.61 per share in the prior year’s period, respectively.

Furthermore, the company’s cash and cash equivalents stood at $475.49 million as of May 31, 2023, compared to $672.60 million as of August 31, 2022.

Unfavorable Analyst Estimates

Analysts expect CMC’s revenue to decrease 10.9% year-over-year to $1.99 billion for the first quarter that ended August 2023. Similarly, the consensus earnings per share estimate of $1.69 for the same period indicates a 24.6% year-over-year decline.

In addition, the company’s revenue and EPS for the fiscal year (ending August 2024) are expected to decline 4.1% and 18.7% year-over-year to $8.41 billion and $6.17, respectively.

Robust Profitability

CMC’s trailing-12-month EBIT margin and net income margin of 14.31% and 10.72% are 27.5% and 64.7% higher than the respective industry averages of 11.23% and 6.51%. Likewise, the stock’s trailing-12-month levered FCF margin of 6.99% is 88.9% higher than the industry’s average of 3.70%.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 26.91%, 15.82%, and 14.79% compare favorably to the industry averages of 8.48%, 5.60%, and 3.97%, respectively.

Low Valuation

In terms of forward non-GAAP P/E, CMC is currently trading at 6.33x, 53.5% lower than the industry average of 13.62x. The stock’s forward EV/Sales of 0.74x is 48.4% lower than the industry average of 1.43x. In addition, its forward EV/EBITDA multiple of 4.44 is 42.4% lower than the industry average of 7.72.

Also, the stock’s forward Price/Sales and Price/Cash Flow of 0.64x and 4.83x are lower than the industry averages of 1.07x and 7.11x, respectively.

POWR Ratings Reflect Uncertainty

CMC’s mixed outlook is reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CMC has a B grade for Value and Quality, in sync with its lower-than-industry valuation and higher-than-industry profitability, respectively.

The stock has a C grade for Stability, justified with its 24-month beta of 1.08.

On the other hand, CMC has a D grade for Growth and Sentiment, consistent with its disappointing financials and unfavorable analyst expectations.

Within the A-rated Steel industry, CMC is ranked #15 out of 32 stocks. Get all CMC’s POWR Ratings here.

Bottom Line  

CMC’s revenue and earnings exceeded analyst estimates in the last reported quarter but were down year-over-year. Further, analysts expect the company to deliver a year-over-year decrease in earnings on lower revenue in the to-be-reported quarter ended August 2023.

While the metal recycling and steel-making company’s long-term prospects appear promising, driven by strategic acquisitions, partnerships, and solid demand for its innovative products and solutions, its growth in the near term could be hampered due to a challenging macro backdrop, especially in Europe.

Given its poor financials and weak near-term outlook, it could be wise to hold CMC and wait for a better entry point in the stock.

Stocks to Consider Instead of Commercial Metals Company (CMC)

Given its uncertain short-term prospects, the odds of CMC outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks within the Steel industry instead:

Nippon Steel Corporation (NPSCY)

Tenaris S.A. (TS)

Russel Metals Inc. (RUSMF)

To explore more A and B-rated steel stocks, click here.

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CMC shares were unchanged in premarket trading Tuesday. Year-to-date, CMC has gained 0.43%, versus a 14.38% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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