Commercial Metals Company (CMC): Rose 40% In The Last 12 Months; Will Continue To Surge

History

Commercial Metals Company (NYSE:CMC) has evolved into a scrap metal processing business using mini mills to produce rebar and other products. Their principal customer base is the construction industry. They have large operations in the South and West up into the Midwest. The scrap it’s processed into steel in the mini mills and the product is further fabricated in other facilities. Most of this is assembling rebar structures. In addition to rebar, they produce road signs, chain link fences, and steel that is unusually resistant to abrasion. They have a large business in Poland, which has a similar operation.

The scrap metal is purchased at market value, which changes rapidly. Their business is seasonal since it depends upon construction. They believe that their facilities are larger and more cost-effective than their competitors, and their locations have a longer construction season. The fiscal year ends as the construction year drops off. The business is slow during the holidays and picks up in the spring. The Polish operation serves the EU and has an advantage because Poland has lower-cost electricity compared to Western Europe. However, they also compete with companies, some of which are outside the EU, and tariffs are major issues. In short, it’s a business with lots of complexity and variability. The business buys heavily on commodity exchanges, not only for base scrap but also alloys that are added to the mix. Their customers tend to be cautious about purchasing because CMC’s products vary in price over the year. To protect themselves with orders and limit the inventory, they are both long and short on metals and commodities exchanges in the US and Europe.

Financial Results

The following chart summarizes operations from fiscal 2020 to fiscal 2022. In addition, there is a projection for fiscal 2023.

COMMERICAL METALS COMPANY

$ (MILLION)

Projection % Sales 2020 % Sales 2021 % Sales 2022 % Sales 2023 Revenue 5,476 100.0% 6,730 100.0% 8,913 100% 10,696 100% Gross Profit 944 17.2% 1,106 20.2% 1,856 20.8% 2,246 21.0% SG&A 507 9.3% 505 9.2% 545 6.1% 642 6.0% Interest 71 1.3% 76 1.4% 72 0.8% 53 0.5% Gain on Sale (4) -0.1% (9) -0.2% (275) -3.1% (21) -0.2% Taxes 92 1.7% 121 2.2% 297 3.3% 428 4.0% total Expense 666 12.2% 693 12.7% 639 7.2% 1,102 10.3% Net Earnings 278 5.1% 413 7.5% 1,217 13.7% 1,144 10.7% Click to enlarge

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Table by Author

The revenue has grown from $5.5 billion in 2020 to $8.9 billion in 2022. Acquisitions and Capital Expenditures were about 3 to 4% but increase to 11% of revenue in 2022. CMC expects a micro mill will be opened in Spring of 2023. They anticipate that this will generate $200,000 EBITDA for that fiscal year. This plant in Arizona would be capable of switching rapidly from rebar to their sheet steel products. A similar plant is under study for the East Coast in 2024.

Debt declined from 46% of capital in 2019 to 17% in 2022. The company has funds to increase shareholder payout through further increases in the 64 cents per year dividend or share buybacks.

The gross margin went from 17.2% in 2020 to 20.8%. In fiscal 2022, they operate on relatively thin gross margins typical of that industry. Growth requires either acquisitions of related businesses or capital expenditures. What makes CMC so strong is that they have the cash flow to do these things where others lack that flexibility. Expenses in 2022 were 12% of revenue, generating net earnings of 5%. In 2022, the net earnings were 13.7% in 2022, but that included gains on sale of assets that represented 3% of revenue. That looks like a one-time event.

The projection for 2023 assumes that the micro mill in Arizona will be in service for the last two quarters of 2023 and will require most of the capital expenses. But approximately $200 million would be spent on increasing productivity and efficiency at other sites. CMC should be able to increase its gross margin slightly from the efficiency of the upgraded plants and the inflationary environment which strengthens those with existing facilities purchased at lower prices. The projection for 2023 excludes a large gain on sales of assets. With a 20% growth in sales, which is lower than the last two years, the profit declines because of the lack of asset sales so that this projection shows earnings about 6% less than 2022. It is likely that the 6% drop can be offset by other changes in the business, so I would project a flat profit for next year, which would be quite good given the extraordinary gains in 2022.

Market

CMC expects good sales from the infrastructure expansion passed through Congress. They also anticipate sales for industrial complexes like the semiconductor facilities, which are highly sophisticated and require high-quality products.

Risks and opportunities

The Polish operations are affected by higher energy costs. Electrical energy in Poland went up 100% with the Ukrainian war, which still gives them an advantage because energy costs in Western Europe are now much more.

Operations in the EU are highly dependent on tariffs. Turkish competitors are a major threat, but that is probably going to be handled by a high tariff.

European construction will be affected by the current poor economic conditions in the EU.

Conclusion

The performance of CMC in the last three years has been solid. Its operations are expected to continue to generate excellent returns per share. CMC is a strong buy.