Commercial Metals (CMC 22.20, -1.47, -6.21%) is trading lower today after reporting Q3
(May) earnings this morning. CMC is a Texas-based producer of steel and metal
products through a network of steel minimills, steel fabrication, and
processing plants. As a minimill, CMC processes scrap metal for use as a raw
material to create new metal.
CMC operates scrap metal processing facilities and it operates five steel mills which make rebar, angles, flats, rounds, small beams, fence post sections, and other shapes. Its fabrication facilities bend, weld, cut, and fabricate steel, primarily rebar. Most of CMC's operations are in the US but it also has a minimill in Poland. CMC is in the process of exiting its International Marketing and Distribution segment.
CMC announced a large acquisition in January 2018, it will acquire some US-based rebar steel mill and fabrication assets from Brazilian steelmaker, Gerdau (GGB) for $600 mln in cash. The deal, which should close by the end of 2018, will add 33 rebar fabrication facilities in the US as well as several steel mills with annual rolling capacity of 2.5 mln tons. The deal provides CMC with a significantly expanded geographic footprint in the largest construction regions in the US. This deal will also significantly increase CMC's exposure to the rebar market and to the construction market generally.
From a broader perspective, many steelmakers focus on steel sheet which is used in automotive, appliances etc. With heavy exposure to rebar, it's fair to think of CMC as more of a construction market play.
Turning to the Q3 (May) results, non-GAAP EPS rose 52% year/year to $0.41 while revenue rose 15.3% year/year to $1.20 bln. Both revenue and EPS grew nicely but were slightly below market expectations. However, adjusted EBITDA from continuing operations was the highest since the financial crisis and improved 56% on a sequential basis from the seasonally slower FebQ.
Strong demand across all segments was a principal driver of the improved results. Additionally, the start-up of its new micro mill in Durant, Oklahoma contributed to the improved results as CMC increased shipments from this facility during the quarter. Capacity is expected to increase further.
Investors are disappointed with the MayQ results. The growth was good but not as strong as the market was expecting. It's possible a cold and wet spring for much of the US could have caused results to come in below expectations. With CMC having so much exposure to the construction market, they are more susceptible to adverse weather than other steelmakers. This probably hurt rebar shipments.
The deal to buy GGB's rebar assets shows us that CMC is doubling down on rebar and the construction market in general. Keep an eye on CMC if a major infrastructure bill gets passed.
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