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Commercial Metals (CMC +4%) constructs a solid Q3 (May) report supported by improving or stable demand across its global markets. While the steel rebar producer, a material used across the construction industry, merely delivered in-line EPS while squeaking out a top-line beat, a recent stock correction lowered the bar ahead of Q3 results. Shares gave up roughly 15% from mid-May highs as of Tuesday's close as worries grew over red flags from steel producers alongside a constantly high cost of capital.

Nevertheless, we remarked last week that as part of our Value Leaders stocks, CMC's sell-off presented a compelling buying opportunity, especially given the several tailwinds that management touched on last quarter, such as sustained demand across the North American construction landscape and expected stability across many of CMC's European markets.

• Even though it did not show up in top-line numbers in Q3, as EPS contracted by 50% yr/yr to $1.02 on an 11% drop in revs to $2.08 bln, these uplifting developments carried into Q3. Also, management reiterated that its margins and earnings are normalizing sustainably above pre-pandemic levels. The company cited two factors underpinning its view: industry consolidation and an improved trade environment (more skilled workforce).
• In CMC's North America Steel Group, net sales slid by 8% yr/yr but improved by 12% sequentially to $1.67 bln, supported by healthy underlying market fundamentals and shipment levels of finished steel products. CMC also remarked that it enjoyed stability in its downstream backlog volumes. In its Europe Steel Group, CMC neared breakeven regarding its adjusted EBITDA margins, delivering a 250 bp improvement sequentially to (2)%.
• The road ahead continues to contain fewer potholes, especially in North America, where CMC commented that construction activity remains sound. The company is heading into the seasonally strong spring and summer months, which should continue to provide a favorable backdrop for stable to modestly improving steel product margins. Management added that it continues to see a solid pipeline of upcoming construction projects, aided by the Infrastructure Investment and Jobs Act.
• In Europe, which comprises only around 10% of annual sales, the economic picture has not changed much compared to last quarter, which marked a meaningful improvement from late FY23 (Aug) and early FY24. Consumption of long steel products is stable, albeit well below historic levels. Management is upbeat about the longer-term dynamics, citing a current supply/demand balance, providing a foundation for greater stability in steel pricing and margins.

CMC's Q3 report underscored a resilient construction market across North America and, to a lesser extent, Europe. By operating primarily within the infrastructure construction industry, CMC is well-positioned to extract significant benefits from city and state budgets that are flush with resources due to the Infrastructure Investment and Jobs Act. CMC cites several promising developments across Texas and Oregon, leading to a long-lasting tailwind in highway and street construction. As such, we continue to like CMC at current levels.