A Member of Pat McKeough’s Inner Circle recently asked for his advice on a manufacturing company that makes, recycles, and fabricates steel and metal products as well as related materials and services in the United States, Poland, and China.
Pat likes the strong demand in North America for the company’s products. The U.S. government’s Infrastructure Investment and Jobs Act is expected to stimulate significant additional demand for rebar, which could positively impact the firm’s sales and profitability. However, Pat notes that the company’s performance subject to current economic uncertainty and market volatility.
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COMMERCIAL METALS COMPANY (Symbol CMC on New York; www.cmc.com) manufactures steel products for industrial and commercial uses in the construction industry and elsewhere.
The company is the largest producer of steel reinforcing bars (rebar) in North and Central America. It also produces merchant bars and steel fence posts. (Merchant bar is used by fabricators and manufacturers to produce a wide variety of products including steel frames and structures, brackets, steel floor and roof joists, walkways, ornamental furniture, railings, and more.)
Commercial Metals has been rebranded as CMC and now has a new logo. The move reflects the company’s recent acquisitions, including most recently Edsco.
In July 2023, Commercial Metals acquired Edsco Fasteners LLC from private equity firm MiddleGround Capital. The purchase price has not yet been disclosed.
Edsco manufactures anchoring solutions for the electric transmission market. Its products include anchor cages, bolts, and fasteners made from rebar. Those get used to secure high voltage electrical transmission poles to concrete.
Based in Texas, Edsco has four plants, with one each in Texas, Utah, Tennessee, and North Carolina. The company’s products will expand Commercial Metals’ position in the construction reinforcement market.
From fiscal 2018 (fiscal years end August 31) to 2019, Commercial Metals’ revenue rose 25.5%, from $4.64 billion to $5.83 billion. Revenue dropped 6.0% in 2020, to $5.48 billion, as the pandemic disrupted customer demand. Revenue then climbed 22.9% in 2021 to $6.73 billion as the pandemic eased. In 2022, revenue climbed further, rising 32.4% to $8.91 billion.
Earnings rose 12.8%, along with revenue, from $176.1 million, or $1.49 a share, in 2018 to $198.6 million, or $1.68 a share, in 2019. In 2020, despite the lower revenue, earnings were up 40.1%, to $278.3 million, or $2.31 a share, on cost cuts.
Earnings then jumped 54.8% in 2021 to $430.9 million, or $3.53 a share. In 2022, they climbed 132.5% to $1.0 billion, or $8.19 a share.
Inner Circle: Recent performance not as good as earlier history
In the three months ended February 29, 2024, Commercial Metals’ revenue fell 8.4% to $1.85 billion. However, downstream contract awards rebounded to the highest quarterly level in nearly two years, signaling at least some strength in the pipeline ahead of the upcoming construction season.
Excluding one-time items, the company earned $85.8 million, or $0.73 a share. That was down 52.3% from $179.8 million a year earlier. However, earnings are expected to grow 7.1% in the coming year.
In the near term, demand for the company’s products has softened with uncertainty about the economy. But Commercial Metals’ long-term outlook is positive. Stimulus spending included in the U.S. government’s Infrastructure and Jobs Act is expected to eventually increase annual rebar demand by 1.5 million tons.
The U.S. push to bring computer chip manufacturing back home from foreign countries has now expanded to 12 development projects. Construction costs total $287 billion and should spur demand for the company’s products. Meanwhile, an additional 20 projects totaling more than $61 billion are planned for the manufacture of electric vehicles and their batteries.
The stock currently yields 1.3%.
Recommendation in Pat’s Inner Circle: Commercial Metals Company is a hold.
