BofA Downgrades Commercial Metals On Supply, Valuation Concerns

Since hitting a low of $19.65 on April 5, shares of Commercial Metals Company CMC have gained about 23 percent, prompting Bank of America Merrill Lynch to revisit its rating on the equity. 

The Analyst

Analyst Timna Tanners downgraded Commercial Metals from Neutral to Underperform and lowered the price target from $24 to $23.

The Thesis

Commercial Metals' valuation already reflects its much better-than-normal earnings power and its proposed plan to acquire four Gerdau U.S. rebar mills that's scheduled to close by the end of the year, Tanners said in a Tuesday note. (See the analyst's track record here.) 

On the downside, the analyst projects potential antitrust challenges to the Gerdau deal due to excess concentration, as imports now face a 25-percent Section 232 tariff, Tanners said. 

Taking into account the weakness of the Turkish lira — which is down 24 percent year-to-date — the price of imported rebar has dropped, resulting in a $125/ton discount to U.S. prices even after tariffs were applied, the analyst said. 

BofA expects U.S. rebar imports to rebound in Q4 after a summer dip, along with additional volume from Steel Dynamics, Inc. STLD.

The U.S. rebar market was oversupplied before the Trump administration's tariffs, Tanners said. Utilization remains below 80 percent, indicating limited pricing power, the analyst said. 

"In recent midquarter updates on peers NUE and STLD we revisit valuation to use 'normal' multiples on conservative benchmark hot rolled coil and still find upside." 

BofA prefers Nucor Corporation NUE and Steel Dynamics to Commercial Metals.

The Price Action

Commercial Metals shares were down 3.86 percent at $23.15 at the time of publication Tuesday afternoon. 

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