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A long-standing component of our Value Leaders board, Commercial Metals (CMC) is a steel rebar producer trading at an attractive valuation. The company, heavily exposed to the construction market, as steel rebar is used extensively in construction and infrastructure projects from residential housing to roads and bridges, has been amid a moderate sell-off in recent trading. The stock has moved around 10% lower from mid-May highs, currently tagging its 200-day moving average (51.33). Following the minor correction, shares sit relatively flat on the year, offering a solid entry point, especially given its valuation at 11x forward earnings and mounting tailwinds.

• CMC may not be as diversified in end markets as some of its steel-making counterparts, like Nucor (NUE) and Steel Dynamics (STLD). However, the company boasts a different type of diversification: global. CMC's products are used across North America and Europe. This geographic footprint has helped cushion against relative weaknesses overseas.
  • For example, during Q2 (Feb), construction activity across North America remained healthy, and management continued hearing encouraging signs from its customers, indicating their backlogs were in sound shape and were witnessing a solid pipeline ahead. These remarks aligned with CMC's internal view; the company anticipates its construction pipeline will remain healthy over the near and longer term.
  • Conversely, in Europe, consumption levels remained subdued during Q2. However, given developments in recent months, CMC expects stable demand across most of its European markets, while residential construction is beginning to look poised for a return to positive growth.
• While not typically known as an AI play, CMC benefits from the outflow of capital into data center construction. CMC commented in late March that the number of data center projects in the bid stage has accelerated over the past few quarters, with the investment pouring into data center development causing demand to surpass supply. While much of this can be tied to more companies transitioning to the cloud, the current AI frenzy could significantly increase the demand for additional data centers. The company anticipates several dozen opportunities to reach the market in the coming months.
• The Infrastructure Investment and Jobs Act is spurring ground activity across many of CMC's U.S. markets, underpinning a sustained healthy construction pipeline, with consumption increasing during the back half of FY24 (Aug). For example, CMC noted that Texas has only awarded around a quarter of its transportation budget in 2024 as of late March. Meanwhile, additional notable sources of structural demand growth are emanating from manufacturing and renewable energy.

Concerns are underpinning CMC's current correction. Growth rates in Q2 were tepid, particularly in Europe, which has been a notable laggard for some time. Additionally, several projects during the quarter were delayed, hindering overall financial performance. However, CMC observed encouraging signals in Europe and believes the project delays will be short-lived. CMC also recently increased its quarterly dividend by 13%, providing investors an annual yield of 1.4%, and raised its repurchase authorization by $500 mln, showcasing the cash-generative strength of its business model. With construction activity expected to ramp during the back half of FY24 at the same time secular tailwinds are emerging, CMC's recent sell-off offers a compelling entry point ahead of its MayQ report on June 20. As always, a stop loss of around 15-20% is a good idea.