During a week when three steel companies guided lower, Commercial Metals (CMC) is trading up nicely today after reporting solid Q3 (May) results this morning. It also made positive comments in terms of its near-term outlook.
CMC focuses almost exclusively on rebar so it is a bit different than the companies that warned this week. Rebar is used in the construction and infrastructure industries. It does not really have exposure to automotive, appliances etc. However, there was some caution heading into this report as STLD said that the unusually wet weather caused some construction project delays. CMC sounded more positive.
CMC posted very good EPS upside and slight revenue upside (see 6:51 comment). CEO Barbara Smith cited "strength [in terms of] construction activity, as well as solid industrial production levels and the resilient US and Polish economies...the fundamentals of the fabrication segment have improved significantly as we have shipped the majority of the lower priced work in our backlog which has resulted in a significant improvement in the segment results."
This last comment on the fabrication segment is important as this has been a weak area for CMC for some time. Basically, the problem was that CMC booked a lot of fixed price contracts at low prices before rebar prices improved. A good amount of this low-priced work came over when CMC acquired fabrication assets from Gerdau (GGB). The company has been working through this low-price tonnage. So, it's good to hear most of it has been shipped out. This segment reported an EBITDA loss in MayQ, but CMC says this segment is approaching breakeven and bidding activity has been strong.
The other key area investors were very interested in was CMC's outlook, especially in light of the recent downside guidance from NUE, STLD, and X. Smith said that CMC's demand outlook "remains very positive driven by the continued strength in non-residential construction activity levels in our markets...we anticipate a strong finish to our fiscal year."
On the product front, CMC recently launched hot spooled rebar which was a "meaningful contributor to [the] top and bottom line." This is a key product as CMC is the only company that sells it. It allows for larger spools, tighter stacks, and no twisting during unspooling. It's good to see it starting off strong.
Bottom line, investors could not have asked for much better MayQ results in light of the recent guide-downs. We had concerns that the wet weather might lead to an EPS miss or the outlook may have been more muted. One might expect the stock to be up more based on the strong results, but it had run 20% in the past few weeks heading into this report.