A long-standing component of our Value Leaders board, Commercial Metals (CMC, Financial) is a steel rebar producer trading at an attractive valuation. Heavily exposed to the construction market, CMC has seen a moderate sell-off recently. The stock has dropped around 10% from mid-May highs and is currently near its 200-day moving average ($51.33). Despite this, shares remain relatively flat for the year, presenting a solid entry point with its valuation at 11x forward earnings and growing tailwinds.
While CMC may not be as diversified in end markets as some of its steel-making counterparts like Nucor (NUE, Financial) and Steel Dynamics (STLD, Financial), it boasts global diversification. CMC's products are used across North America and Europe, cushioning against overseas weaknesses.
- In Q2 (Feb), North American construction activity remained healthy, with management noting positive feedback from customers. CMC expects its construction pipeline to stay robust in the near and long term.
- In Europe, consumption levels were subdued in Q2. However, recent developments suggest stable demand across most European markets, with residential construction poised for growth.
Though not typically seen as an AI play, CMC benefits from capital flowing into data center construction. In late March, CMC noted an acceleration in data center projects at the bid stage, driven by increased cloud adoption and the current AI boom. The company expects several dozen opportunities to emerge in the coming months.
The Infrastructure Investment and Jobs Act is boosting activity in many of CMC's U.S. markets, supporting a healthy construction pipeline with increasing consumption expected in the latter half of FY24 (Aug). For instance, Texas has only awarded about a quarter of its 2024 transportation budget as of late March. Additional demand growth is coming from manufacturing and renewable energy sectors.
Concerns underpinning CMC's current correction include tepid Q2 growth rates, particularly in Europe, and project delays that hindered financial performance. However, CMC sees encouraging signs in Europe and expects the delays to be short-lived. The company recently increased its quarterly dividend by 13%, providing an annual yield of 1.4%, and raised its repurchase authorization by $500 million, highlighting its cash-generative business model. With construction activity anticipated to ramp up in the latter half of FY24 and emerging secular tailwinds, 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 advisable.
