Commercial Metals (CMC +4%) delivered a solid Q3 report, supported by stable and improving demand across its global markets. The steel rebar producer reported in-line EPS and a slight top-line beat. Despite a recent stock correction, which saw shares drop about 15% from mid-May highs, the Q3 results were encouraging.
Last week, we noted that CMC's sell-off presented a compelling buying opportunity. The company's management highlighted several tailwinds, such as sustained demand in North America and stability in European markets.
- Despite a 50% yr/yr EPS contraction to $1.02 and an 11% revenue drop to $2.08 billion, management reiterated that margins and earnings are stabilizing above pre-pandemic levels. This is supported by industry consolidation and an improved trade environment.
- In North America, net sales fell by 8% yr/yr but improved 12% sequentially to $1.67 billion, driven by strong market fundamentals and shipment levels. The downstream backlog volumes also remained stable. In Europe, adjusted EBITDA margins improved by 250 basis points sequentially to (2)%, nearing breakeven.
- Looking ahead, North American construction activity remains robust, with the company entering the seasonally strong spring and summer months. This should support stable to modestly improving steel product margins. The Infrastructure Investment and Jobs Act continues to provide a solid pipeline of upcoming construction projects.
- In Europe, which accounts for about 10% of annual sales, the economic conditions have remained stable since last quarter. Long steel product consumption is steady, albeit below historic levels. Management is optimistic about long-term stability in steel pricing and margins due to a balanced supply/demand environment.
CMC's Q3 report highlights a resilient construction market in North America and a stable outlook in Europe. The company benefits significantly from infrastructure projects funded by the Infrastructure Investment and Jobs Act, with promising developments in Texas and Oregon driving long-term growth in highway and street construction. We continue to view CMC favorably at current levels.
