Shares of Commercial Metals Co. rose Monday after a security analyst initiated coverage of the carbon steel maker with a "Buy" rating on the shares and suggested it would make an attractive takeover prospect.
UBS Investment Research analyst Timna Tanners praised the Irving, Texas-based company's vertically integrated structure, which she said would fit well with Charlotte, N.C.-based Nucor Corp. and Brazil's Gerdau SA.
"We consider CMC the most likely acquisition candidate of North American publicly traded steel mills," she wrote.
Tanner also cited Commercial Metals' diversified portfolio, which stabilizes earnings in a variety of markets.
"We have strong conviction in the longer-term value of CMC shares, driven by robust international growth and the potential for it to be acquired."
In the near term, though, the analyst warned of "margin pressure or containment on rising scrap costs, trouble passing costs downstream and big LIFO charges."
LIFO refers to the last-in-first-out method that assumes the most recent inventory purchases or goods manufactured are sold first. In periods of rising prices that results in an expense that eliminates inflationary profits from net income.
The likelihood of big LIFO charges _ in the near future _ contributed to Goldman Sachs analyst Sal Tharani on Friday cutting his earnings estimates and price target on the shares.
He raised his estimate on the steel producer's third-quarter LIFO charge to $60 million from $20 million. Tharani, who has a "Neutral" rating on the shares, also cut his price target by a dollar to $36 and reduced his 2008 earnings-per-share estimate to $2.51 from $2.72.
Analysts polled by Thomson Financial expect 2008 earnings per share of $2.50.
Shares gained $1.19, or 3.8 percent, to $32.90.
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