Steel mini-mill operator Commercial Metals (NYSE:CMC) is scheduled to report its fiscal Q3 2006 earnings tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • General consensus. Five analysts follow CMC, with three rating the stock a buy and two a hold.
  • Revenues. Analysts expect to see CMC's fiscal sales fall 3% year over year tomorrow, to $1.7 billion.
  • Earnings. Yet profits are predicted to rise 23% to $0.70 per share.

What management says:
CMC's most recent 8-K filing with the SEC contained two pieces of news. One was inconsequential: CMC split its stock 2-for-1 in late May. No big whoop there. But the other announcement could be greatly important to investors who, like subscribers to the Fool's dividend-hungry Income Investor newsletter, like to see their companies share the wealth. For the second time in four months, CMC upped its dividend payment.

In January, CMC raised its quarterly payment from $0.06 per share to $0.10. The May announcement returned the dividend to $0.06 -- but applied that dividend to both of the new shares that each old share would become. That effectively gave $0.12 per share to pre-split shareholders, and represented an additional 20% increase in the dividend. (Then again, the two dividend increases combined still bring CMC's yield to just 1%, so don't expect the stock to join our Income Investor portfolio anytime soon. Our picks average closer to a 4.5% yield.)

What management does:
According to CMC CEO Stanley Rabin, the higher dividend payout reflects "CMC's confidence in our near-term as well as long-term business prospects." Judging from the below chart, CMC has every reason to be confident. Despite high raw material costs, the firm has maintained its 13.8% rolling gross margin right where it was a year ago. Over the last six months, CMC's cost of goods sold has even trailed its average revenues slightly. Meanwhile, by holding operating costs to just a 1% increase over last year, even as sales rose 5%, CMC has expanded its operating and net margins considerably.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
That said, I'm not too fond of this stock. Despite its improvement, it's not yet even close to the quality of industry leader Nucor (NYSE:NUE), for example.

CMC currently trades for 20 times its trailing free cash flow, while carrying a long-term debt-to-equity ratio of 36%. In contrast, Nucor trades for just more than eight times free cash flow, and has a debt-to-equity ratio of 20%. If I were investing in a steel company, I just wouldn't see the logic of buying a pricier company with a weaker balance sheet, especially when there's a quality operation with a stronger balance sheet available for a lower price. Whatever news CMC produces tomorrow, no matter how good, I don't expect it to change the mechanics of that value calculation.


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Fool contributor Rich Smith has no interest, short or long, in any company named above.