Commercial Metals Bets on US Demand as Europe Market Ails

Commercial Metals Company's CMC results are gaining from strong demand in North America for each of its primary product lines. CMC is implementing price rises across its mill products, which will aid growth. The company's solid balance sheet bodes well.

However, results have been impacted by lower steel product margins than scrap costs. The company expects margins on steel products to experience further compression in the upcoming quarters. Sluggish demand in Europe is putting pressure on pricing and margins. These market conditions in Europe are expected to persist.

Solid Demand & Pricing Actions: The impacts of the robust demand in North America for each of Commercial Metals' major product lines are expected to be reflected in the company's results. CMC is also implementing price rises across its mill products in response to rapidly rising scrap costs, which will sustain margins.

The company expects the financial performance of the Emerging Businesses Group to gain from stable underlying market fundamentals and a solid order book. Business circumstances for the Europe Steel Group are gradually improving and should further benefit from increasing residential construction activity.

Impressive Strategic Actions: Commercial Metals will benefit from the Infrastructure Investment and Jobs Act signed in November 2021, which will provide 1.2 trillion in funding over five years and stimulate an estimated 1.5 million tons of incremental annual rebar demand at a full run rate.

The commissioning of the Arizona 2 micro mill, as well as the addition of Tensar's engineered solutions capabilities, will provide the company with greater flexibility to capitalize on these favorable demand conditions.

Commercial Metals' focus on augmenting its core capabilities while expanding growth in markets, customer groups and applications will aid growth. The company continues to gain from its ongoing network optimization efforts, which will yield additional margins and reduce costs in the near future.

Strong Balance Sheet: Commercial Metals' total liquidity reached $1.5 billion as of May 31, 2024. The company reported cash and cash equivalents of $698 million at the end of the third quarter of fiscal 2024 compared with $592 million at the end of fiscal 2023.

Its strong liquidity, financial position and focus on reducing debt by strategic capital allocation approach will stoke growth. This further underscores the company's ability to meet debt obligations.

On Jun 19, Commercial Metals declared a quarterly dividend of 18 cents per share. The dividend will be paid out on Jul 10 to shareholders of record as of Jul 1, 2024.

Near-Term Concerns

The company has been bearing the impacts of lower steel product margins over scrap costs in North America and Europe. European Union sanctions placed on imported materials from Russia and Belarus are expected to tighten the supply of long steel products. If the situation persists, this is expected to dent the company's margin.

In Europe, sluggish demand put pressure on pricing and margins in the first half of fiscal 2024. Sentiment and activity levels in the company's construction and industrial end markets were impacted by general economic uncertainties.

In response to market imbalances, the Polish long steel industry has significantly reduced production and inventory levels. Conditions in Europe are projected to be challenging, weighing on the company's results.

Price Performance

Shares of CMC have gained 2.3% in the past year against the industry's decline of 0.2%.

Image Source: Zacks Investment Research

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks from the basic materials space are Ero Copper Corp. ERO, Ecolab Inc. and ATI Inc. ATI. While ERO sports a Zacks Rank #1 (Strong Buy), ECL and ATI carry a Zacks Rank #2 (Buy) at present.

The Zacks Consensus Estimate for Ero Copper's 2024 earnings is pegged at $1.66 per share. The consensus estimate for 2024 earnings has moved 20.3% north in the past 60 days. It has an average trailing four-quarter earnings surprise of 53.9%. ERO shares have gained 9.5% in a year.

The Zacks Consensus Estimate for Ecolab's 2024 earnings is pegged at $6.59 per share, indicating an increase of 26.5% from the prior year's reported number. It has an average trailing four-quarter earnings surprise of 1.3%. ECL shares have gained 34.5% in a year.

The Zacks Consensus Estimate for ATI's 2024 earnings is pegged at $2.41 per share. The Zacks Consensus Estimate for ATI's current-year earnings has been revised 3% north in the past 60 days. It has an average trailing four-quarter earnings surprise of 8.3%. The company's shares have rallied 65.9% in the past year.

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