Sometimes the safest way to avoid disappointment is to lower your expectations.
Commercial Metals (NYSE: CMC ) annihilated industry analysts Tuesday with a $0.28-per-share loss in the fiscal first quarter of 2010. The hemorrhage was six times worse than analysts expected, even as revenue dropped by a more reasonable 39% from prior-year levels.
I will spare you the vagaries of shrinking metal margins and the company's 1,400-basis-point reduction in mill capacity utilization (to just 54%), and focus instead upon what I consider the greatest gift that a company can offer investors as we head into 2010: well-informed market insight.
China was practically a one-horse show in 2009, injecting stability into a substantially paralyzed global economy. In the view of Commercial Metals' CEO, at least, that theme is set to continue for the year ahead:
China will be the catalyst in calendar 2010 with anticipated GDP growth between 9-10% and greater steel demand than in 2009; this most likely will exert upward pressure on both iron ore and scrap prices. The rest of Asia should follow China with anticipation of strong demand for scrap and billet export opportunities to the region. Australia should continue what is developing as a strong recovery.
With Asian steelmakers like POSCO (NYSE: PKX ) already operating at about 92% of capacity, the outlook for further strengthening is bullish indeed for related miners like Vale (NYSE: VALE ) and Teck Resources (NYSE: TCK ) . Since the undeniable importance of China to a recovering global economy is hardly a secret at this stage, investors may find greater value in the company's analysis of the domestic industrial outlook.
Echoing recent observations by fellow bellwethers Nucor (NYSE: NUE ) and Joy Global (Nasdaq: JOYG ) , Commercial Metals confirms that "real sustainable domestic increases in demand were not apparent and there was no discernable stimulus effect." Despite this failing grade for government stimulus initiatives to date, Commercial Metals expressed hope that an impact "may finally be evidenced by spring," resulting in a modestly "more promising" outlook for the second half of fiscal 2010.
Digging deeper, the company offered something of a naughty list that outlines some persistent issues forestalling a domestic recovery. According to Commercial Metals, the principle obstacles to domestic recovery remain: impaired liquidity, high unemployment and the resulting drag upon commercial expansion, the budgetary woes that so many state governments now face, and "no effective stimulus for construction."
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