Good Afternoon Gents,
I know many of you (at least my fellow Americans) are gearing up for fireworks, brats, and beer on the forth. I am too. So much so that by the end of writing this DD my brain had started to "phone it in" and I couldn't come up with a clever title…I need a vacation.
Moving on. This is my third company DD, and my goal (as always) is to provide you will all the info I have so you can make your own EDUCATED decisions. THAT MEANS do not just take my word for any of this. I suggest you all “trust but verify”.
As with all my DD’s, I’m not going to talk about short interest (SI) because you should invest in companies for better reasons (my personal opinion). Additionally, most shorts aren’t naked, so SI doesn’t paint a good picture of whether or not a squeeze could occur.
Commercial Metals Company ($CMC)
Commercial Metals Company manufactures, recycles, and fabricates steel and metal products utilizing electric arc furnace ("EAF") mini mills, EAF micro mills, rerolling mills, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities in the U.S. and Poland.
Fundamentals and Recent Accomplishments/Developments:
THEY JUST KEEP BEATING EARNINGS. They have also been increasing over the past 3 quarters. Despite this, it seems the market hasn't reacted and the price of CMC has been trading relatively flat to down since the latest blowout earnings.
P/E=11.29 (low relative to DIA which is between 19.8 and 22.6)
Debt/Eq = 0.5 (very very low, stable company)
CMC leads in the markets that they are in.
The following info is from the 2021 3rd quarter earnings presentation here:
EBITDA has grown significantly over the past year. Up 49% year-over-year and 35% sequentially; and record North America and Europe segment Adjusted EBITDA.
Additionally, this is CMC’s seventh consecutive quarter of year-over-year reduction in North America controllable costs per ton. And 7 is a super lucky number too.
Continued growth is expected to be fueled by the commissioning of a third Polish rolling line and receipt of air permit for Arizona 2 project. The Arizona 2 micormill will be the first micromill in the world to produce merchant bar and rebar.
Slight bummer here. Margin over scrap cost on downstream products declined compared to a year ago, driven by higher scrap input costs and average pricing that was largely unchanged.
On the flip side, margins over scrap cost on steel products increased $40 per ton from the prior year period, marking the first year-over-year increase in six quarters. On a sequential basis these margins rose $74 per ton. This trend is expected to continue until mid 2022 with elevated pricing into 2023.
Margin and EBITDA in Europe have exploded this last quarter. The improvement was driven by a significant expansion in margin over scrap as well as volume growth, as demand for steel products from both construction and industrial end markets remained strong during the quarter.
Resilient construction activity supported a 16% increase in rebar shipments compared to a year ago, while the continuing manufacturing recovery in Poland and Central Europe drove 4% growth in volumes of merchant and other. Average selling price increased by $227 per ton compared to the prior year quarter, and $132 per ton sequentially.
This type of cash flow allows CMC to fund projects utilizing “organic cash generation”. I take this to mean that the company won’t be selling stock.
CMC is anticipating that the strong demand expressed by the sector should support robust shipment levels of finished steel during the fourth quarter in both North America and Europe. Construction activity is strong and the industrial sectors are growing in both the U.S. and Central Europe, as both regions continue to recover from the pandemic.
CMC also expects 4th quarter margins over scrap on steel products in North America and Europe to be up modestly from third quarter levels (3rd quarter margins already up $74 per ton sequentially in North America, up $84 in Europe).
CMC’s stability of in their construction backlog and willingness of downstream customers in North America to contract new work point to continued demand strength. The CEO stated that “This view is supported by several widely monitored construction indicators that generally lead activity by nine to twelve months, which have improved significantly in 2021,”.
Biden Infrastructure Plan
On June 24th President Joe Biden declared “we have a deal” on a major infrastructure initiative after meeting with a bipartisan group of senators. The deal will pump $1.2 trillion into roads, bridges, tunnels and broadband. These are the markets that CMC services primarily (minus broadband).
Biden has delinked the infrastructure bill from some additional Democratic plans. This move gained support from Republicans and has increased the likelihood that the infrastructure bill will pass.
Once passed, CMC could benefit greatly from government contracts.
Why I think the stock is good:
Very simple (and similar to $TX), the company has no debt. They produce something that everyone needs. That thing is steel. Steel costs a lot of money and will continue to into the foreseeable future.
The CME group bumped hot-rolled coil (HRC) steel futures to over $1000 out till Jan 2023 (previously Dec 2022). HRC futures for the near-term months are continuing to climb above $1800, and my personal conversations with Civil Engineers indicate that clients are still begging to build new structures regardless of the material costs.
CMC doesn’t produce HRC, however I THINK the price of rebar (and steel in general) tends to track with the price of HRC.
Also, I really am starting to believe that some semblance of an infrastructure bill will get pushed through.
Downside: CMC doesn’t service the US automotive industry and shouldn’t see much benefits from the easing of the semiconductor shortage.
Thanks for reading.
"The men who have succeeded are men who have chosen one line and stuck to it." – Some Rich Asshole
All calls. Volatility is low.
10 Calls, $28 strike, 9/17 exp
5 Calls, $30 strike, 9/17 exp
TL;DR – Another steel play of mine. Seems like an obvious winner here. Go full rebar.
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