On Wednesday, Wolfe Research adjusted its stance on Commercial Metals Company (NYSE:CMC) shares, moving the steel and metal product manufacturer's stock rating from Outperform to Peer Perform. The revision follows a tempered outlook for the U.S. construction sector and challenges faced by the company's operations in Poland.
Wolfe Research cites a cautious U.S. construction forecast as a key reason for the downgrade. The firm projects a lighter fiscal quarter ending September 2024 for Commercial Metals, with an estimated $235 million in earnings, which aligns with the consensus but falls short of management's guidance for flat quarter-over-quarter results. Despite new capacity potentially aiding volume marginally, Wolfe Research does not anticipate demand to be robust enough for the company to operate at full capacity.
The analyst's report also highlights a flat to lower spending environment in the non-residential construction sector for 2025, influenced by the private sector's delayed response to the recent rise in interest rates. Although federal spending has offered some support, the growth is expected to be modest due to inflation and project delays.
In Poland, the company's margins are being squeezed by competitive imports, especially from Western Europe. Wolfe Research's new fair value range for Commercial Metals is set between $49 and $59, based on a 6.5x forward 2025 estimated enterprise value to EBITDA (EV/EBITDA) multiple. This valuation remains unchanged and does not include a price target, adhering to Wolfe's policy for stocks rated Peer Perform.
The research firm acknowledges that while the multiple exceeds the company's three-year and ten-year average of 6x, it still represents a significant discount compared to industry peers Nucor Corporation (NYSE:NYSE:NUE) and Steel Dynamics , Inc. (NASDAQ:STLD). This valuation is justified by Commercial Metals' stronger balance sheet and less product diversity. Wolfe Research also suggests that the limited number of domestic players could bolster rebar margins beyond historical levels.
In other recent news, Commercial Metals Company reported strong Q3 financial results, with net earnings of $119.4 million, and net sales reaching $2.1 billion. The company's consolidated core EBITDA stood at $256.1 million, demonstrating a 12.3% margin. Concurrently, Commercial Metals announced the appointment of Kekin Ghelani as Senior Vice President, Chief Strategy Officer, who will be responsible for strategic planning, growth, and overseeing mergers and acquisitions.
In leadership transitions, Barbara R. Smith will retire as Executive Chairman of the Board in 2024, with Robert S. Wetherbee succeeding her. Moreover, Tandra Perkins will join the Board, bringing her extensive leadership experience. Research firm Jefferies initiated coverage of Commercial Metals with a Buy rating, highlighting the company's strong position in the US rebar market and competitive valuation.
In terms of project progress, Commercial Metals anticipates EBITDA breakeven for the Arizona micro mill in Q4 fiscal 2024 or Q1 fiscal 2025. The company has revised its capital spending outlook for fiscal 2024 to $400 million to $425 million, while planning for capital expenditures around $600 million to $650 million for fiscal 2025. These are the recent developments at Commercial Metals Company.
InvestingPro Insights
To complement Wolfe Research's analysis, recent data from InvestingPro offers additional context on Commercial Metals Company's financial position. The company's P/E ratio stands at 10.82, indicating a relatively modest valuation compared to earnings. This aligns with the InvestingPro Tip that the stock's valuation implies a strong free cash flow yield, which could be attractive to value-oriented investors.
Despite the challenges highlighted in the Wolfe Research report, CMC has demonstrated financial resilience. An InvestingPro Tip notes that the company has maintained dividend payments for 54 consecutive years, showcasing a commitment to shareholder returns even in fluctuating market conditions. Moreover, CMC's dividend yield is currently 1.37%, with a 12.5% dividend growth in the last twelve months, potentially offering income-seeking investors a growing stream of returns.
The company's financial health appears solid, with InvestingPro data showing that liquid assets exceed short-term obligations, and the company operates with a moderate level of debt. This financial stability could provide CMC with the flexibility to navigate the challenging construction market outlook described in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for CMC, providing a deeper understanding of the company's financial position and market performance.
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