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Commercial Metals Company Is Hidden Gold

Not even a day after analyst Michael Glick of JPMorgan initiated coverage on the steel industry calling it a generational opportunity, Commercial Meta...

This story originally appeared on MarketBeat

A Generational Opportunity And Commercial Metals

Not even a day after analyst Michael Glick of JPMorgan initiated coverage on the steel industry calling it a generational opportunity, Commercial Metals Company (NYSE: CMC) released its calendar Q2 earnings report blowing past all expectations. In his view, steel price may be at the top but the surge in prices is providing the steel industry with the cash it needs to reposition itself for long-term and sustainable profitability. contributor/ via MarketBeat

Glick initiated Commercial Metals Company at neutral with a price target of $39 assuming roughly 30% upside from today's price action. Based on the results, the rising fuel prices, and the outlook for long-term economic activity and infrastructure spending, we agree that the steel industry is a good buy. The difference is that we see shares of this company moving well above the $39 level.

"CMC achieved exceptional results during the third quarter. Demand for our products was robust and our teams executed well, setting new production and shipment records at several of our facilities," said Barbara R. Smith, Chairman of the Board, President and Chief Executive Officer.

Commercial Metals Company Beat On The Top And Bottom Line

Commercial Metals Company had a great quarter and one that was supported not only by demand but by rising prices. The company reported $1.84 billion in net revenue which is an increase of 37.3% over last year and nearly 15% in the two-year comparison. The revenue beat the consensus by nearly 600 basis points supported by a 9% increase in shipments of finished steel and downstream products.

In the US, EBITDA improved 30% on a $40 per ton Improvement in margin while in the EU EBITDA rose 250%. Moving down to the bottom line, the company's GAAP EPS of $1.07 beat by $0.27 while the adjusted $1.04 beat by $0.20. Looking forward, the company is expecting revenue strength and earnings gains to continue due to continued high levels of demand that coincide with the outlook for economic reopening.

"Strong demand across multiple end-use markets should support robust shipment levels of finished steel during the fourth quarter in both North America and Europe. Construction activity is strong and the industrial sectors are growing in both the U.S. and Central Europe, as both regions continue to recover from the pandemic. We expect margins over scrap on steel products in North America and Europe to be relatively flat or up modestly from third quarter levels."

Commercial Metals Company Dividend Is Strong As Steel

Commercial Metals Company pays a dividend that yields about 1.5% and we think it is a strong payout. Not only is the payout ratio exceptionally low at 17% but the balance sheet is sound, the company's capital position is growing, and there's plenty of free cash flow. This company has never increased its payout in the history of paying the distribution so we are not expecting one but a distribution increase is possible. That said, we have no expectation that the payout will be cut or suspended for the foreseeable future.

The Technical Outlook: Commercial Metals Falls On Strong Earnings

Shares of Commercials Metals Company are down more than 3.5% in the wake of the report and might be headed lower. It is possible the stock will find support at the $30 level but we recommend waiting for confirmation before buying in. A move below $30 could take the price action down to the $27 to $28 range. Longer-term we expect it and the steel industry to forge a path higher.

Commercial Metals Company Is Hidden Gold

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