The global steel market is in chaos, thanks to China’s construction slowdown. As the world’s largest steel (HVF25) producer grapples with reduced demand and stringent developer financing limits, an oversupply of steel is flooding the market and sending prices for essential materials like h-beams and rebar tumbling. While these ripple effects have cast doubt on the health of the global steel sector, the U.S. market is poised for a different story.
The U.S. steel market, despite global headwinds, is showing strong potential as domestic conditions begin to improve. Over the past year, high interest rates have slowed down residential and commercial construction, putting a damper on steel demand. However, with the Federal Reserve signaling an interest rate cut as early as this month, the tide is expected to turn.
As borrowing costs ease, demand for steel in residential and commercial projects is set to bounce back, creating a brighter outlook for American steelmakers. That being said, for investors targeting a blend of reliable dividend income and cyclical upside in a recovering market, Commercial Metals Company (CMC) could be an ideal choice. So, here’s a closer look.
About Commercial Metals Stock
Texas-based Commercial Metals Company (CMC) is a powerhouse in the steel industry, delivering innovative products that meet diverse market needs. As one of the largest manufacturers of steel reinforcing bars (rebar) in North America and Central Europe, CMC plays a crucial role in major construction projects spanning these two continents. Beyond rebar, the company excels in producing merchant bars, steel fence posts, and wire rods, solidifying its leadership in the steel long products market.
Valued at a market cap of roughly $5.7 billion, this rebar manufacturing leader is down about 16.5% from its July highs of $61.26. Although the stock has lost 1.4% over the past year, CMC has bounced back from this week’s newly set 2024 lows.
The company maintains a three-year streak of consecutive dividend hikes, which demonstrates its dedication to returning value to its shareholders. On July 10, Commercial Metals paid out a quarterly dividend of $0.18 per share, representing a notable 13% annual jump and marking the 239th consecutive quarterly payment by the company. This brings its annualized dividend to $0.72 per share, offering an attractive 1.45% yield.
With a conservative payout ratio of just 12.46%, indicating the dividend is comfortably covered by earnings, there's ample potential for future dividend hikes. But dividends aren't the only way Commercial Metals shares the wealth. In Q3, the company repurchased $51.8 million worth of shares, and as of May 31, it still has $458.6 million remaining under its repurchase program.
In addition to its solid dividend yield, CMC stock appears to be quite a bargain, trading at just 9.02 times forward earnings and 0.72 times sales, which is well below the respective sector medians.
CMC Soars on Q3 Earnings Release
Commercial Metals reported its fiscal Q3 earnings results on June 20 before the opening bell, triggering a 3.8% surge in its shares on the day. Despite a slight year-over-year dip in its top- and bottom-line figures, the company’s Q3 net sales of $2.08 billion and adjusted EPS of $1.02 edged past Wall Street’s expectations by narrow margins.
During the quarter, the company’s core EBITDA reached $256.1 million with a margin of 12.3%. Although these figures are down from the previous year, they represent a sequential improvement from $212.1 million and an 11.5% margin registered in the prior quarter. Moreover, CMC’s balance sheet remains solid, with cash and cash equivalents hitting $698.3 million and available liquidity soaring to nearly $1.5 billion as of May 31.
CEO Peter Matt highlighted that core EBITDA, margins, cash flows, and net earnings all surpassed long-term averages and showed sequential improvement, fueled by a robust start to the 2024 construction season and solid operational performance.
The CEO added, “Encouragingly, we are realizing the impact of infrastructure activity on the demand for CMC's early phase construction solutions, and expect the magnitude of this impact to grow over the next several years."
While the company didn’t offer formal guidance, management indicated in its Q3 earnings release that consolidated financial results for the Q4 quarter are expected to align with Q3 levels.
Furthermore, finished steel shipments in the North America Steel Group are projected to remain flat sequentially, with the adjusted EBITDA margin anticipated to stay relatively stable. In contrast, the Europe Steel Group is expected to continue its quarter-to-quarter improvement in adjusted EBITDA, despite challenging market conditions.
What Do Analysts Expect for Commercial Metals Stock?
Recently, Jefferies launched a “Buy” rating on Commercial Metals, with a $65 price target, forecasting that strong steel prices will drive sustainable earnings over the next three to five years.
Jefferies analyst Christopher LaFemina pointed out that rebar and structural steel prices in the U.S. have remained resilient compared to flat-rolled steel, thanks to a surge in construction demand driven by policy investments. Thanks to Commercial Metals’ “high market share in the consolidated U.S. rebar market and its discount valuation relative to its major EAF peers," the analyst thinks the stock should outperform.
Plus, as policy-driven investments continue to boost U.S. rebar prices, LaFemina expects CMC’s valuation gap with its peers to narrow. The analyst forecasts approximately 20% earnings growth for Commercial Metals from fiscal 2024 to fiscal 2026.
Overall, Wall Street is optimistic about CMC, with a consensus “Moderate Buy” rating. Out of the six analysts offering recommendations, three advise a “Strong Buy,” and the remaining three analysts maintain a “Hold.”
The mean price target for CMC is $63.40, indicating expected upside potential of 23.6% from current levels. The Street-high target price of $69 implies that the stock could rally as much as 34.5% from here.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
