By MarketBeat. Originally published at ValueWalk.
Undervalued, Overperforming Commercial Metals Company Moves Higher
Commercial Metals Company (NYSE:CMC) was not immune to the correction that swept the market this year. A mounting fear of slowing business, tightening margins, and earnings weakness drove shares to a 25% decline but that move is over. Now, trading at only 5X its earnings estimate, the stock is outperforming on all metrics and also raising guidance. In this light, the stock is due for an updraft simply to keep it in line with its ultra-low valuation but the reality, we think, is much better. The company’s performance and outlook warrant a higher multiple in our book and that means a price-multiple expansion that could see the stock double in price by the end of the year.
The analysts are bullish on the stock but not bullish enough in our view. There’ve been no commentaries in the wake of the release, however, which leaves the door open to an analyst-driven catalyst. Until then, the stock is rated a weak Buy by 8 sell-side analysts with a price target of $44.13. This target is about 18% above the current price action and it is trending higher in the 12, 3, and 1-month comparisons. Assuming we’re right about the analysts, we see both the rating and the consensus price target edging higher over the next quarter as well.
Commercial Metals Company, Striking While The Iron Is Hot!
Commercial Metals Company has a fantastic quarter supported by volume and pricing in both its key operating regions. The company reported $2.52 billion in net revenue for a gain of 36.2% over last year and beat the Marketbeat.com consensus estimate by 860 basis points. The most exciting part of the report, however, is the margin which came in at record levels for both raw steel and finished steel products. In regard to the margin, the core EBITDA margin grew 110%YOY to drive a 140% increase in the GAAP earnings. The GAAP earnings were impacted by share repurchases over the course of the last year, on an adjusted basis earnings are up 150% to $2.61 which beats the consensus by $0.76 and the guidance is just as favorable.
Commercial Metals Company cited multiple factors that are expected to drive results in Q4 including pricing, demand, and the backlog which continues to grow. Although the company did not give in formal guidance in response to these factors, we view them favorably and are expecting to see not only sequential growth but for YOY growth to accelerate and margin strength to continue as well. The risk is that overly aggressive central bank activity over the next 3 months could dampen demand and weigh on pricing but those effects are not expected to hinder FQ4 results, only the outlook moving forward. In this light, shares of Commercial Metals Group could easily move back up toward the recent but gains may be capped if the economic outlook darkens.
Commercial Metals Is Growing Its Dividend
Commercial Metals does not pay an incredibly high yield nor does it have a robust history of increases but it does pay a healthy 1.5% with an expectation for distribution growth. At the current level, the payout is less than 10% of earnings and it was just increased by 17%. This is the second consecutive increase since the pandemic began and we see ample room in the numbers for additional increases, share repurchases, or special payments given the earnings environment.
Turning to the chart, Commercial Metals Company hit a peak in early spring and retreated to a strong support level. That level has since been confirmed as a bottom that has price action on the rebound in the wake of the Q3 results. The price action is now moving up from the $36 level with its eyes on the short-term EMA. A move above the EMA at $39 would be bullish and could take the stock up to the $42 level or higher.
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Article by Thomas Hughes, MarketBeat
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