Approaching its 100 year anniversary should be a point of celebration for Commercial Metal Corporation (NYSE:CMC). Founded in 1915, this company has grown from a single steel recycling location to a multinational conglomerate with 200 locations in 20 different countries. However, since the economic recession of 2008, CMC's stock price has fallen by nearly 50%. In six years, CMC has not made progress in breaking above the $21.00 high, leading many investors to ask if this is a company who can afford to celebrate.
With $6.9 billion in revenue and a roughly even split of 54% to 46% American and international revenues, CMC is a major player in the non-residential rebar manufacturing construction industry and is currently contributing to 16% of the Americas market. The last few years have seen fluctuation within the company's income, with net income rising from a loss of $129.4 million in 2011 to positive $207.4 million in 2012 before decreasing to $77.3 million by year's end 2013. While the company may have generated positive net incomes, there are signs to hold off on celebrations.
While the Americas Fabrication sector recorded an increased year-over-year profit of $28.0 million in 2013 due to an increase of selling price of structural rebar fabrication, the remainder of CMC's divisions, including its international mill, Americas recycling and Americas mills profit margins dropped. Margins for the Americas recycling compressed by 15%, and international shipments dropped by 17% in 2013; these metrics show that the company is still struggling within an uncertain economy and construction growth.
Additionally, rebar imports to the United States have steadily increased to 400,000 tons and look to continue and the industry rebar spread nearly $50 per short ton since 2012, compressing margins and may cause domestic problems for CMC as it tries to compete in its primary market. However, the company's second quarter 2014 earnings show that the company was able to increase its net income to $11 million from $1.64 billion in sales, up from $4.5 million from $1.68 billion in sales in the second quarter of 2013.
Attributable to a decrease in COGS, CMC looks to be showing that it can take advantage of the lower price of scrap and recycling and turn it into profits.
While an international company, the majority of the company's American operations exist within the United States "Sunbelt." This includes California and Texas, two of which are projected to be America's highest growing non-residential construction states; these two states alone made up nearly a quarter of the 2013 projected growth. Projections through 2018 indicate that the "Sunbelt" will outpace the rest of the country in non-residential construction, the architecture building index (ABI), of both the western and southern United States. It was showing growth for the entire year of 2013, and that growth is projected to continue.
Internationally, the European Manufacturing PMI has finally ended its contraction and has begun growing again. CMC's Poland operations seem ideally positioned to provide shipments to other EU counties and to take advantage of the $143 billion in EU improvement funds earmarked for Poland through 2020.
Additionally, the company recently sold off its wholly owned subsidiary, the Howell Metal Company, which manufactures copper piping for an after-tax profit of $15.5 million. This sale shows that the company is looking to refocus on its core business and focus on improving its margins.
Is CMC the right steel company for your portfolio?
CMC's P/E ratio of 32.97 skewed toward the higher end of its peer group, with regional and industry competitors Nucor (NYSE:NUE) and Gerdau S.A. (NYSE:GGB) at 31.62 and 12.89 respectively. Looking at the ratios, however, CMC falls short of its competitors with a ROA of 2.16 and an operating margin 2.67, lower than both Nucor (with an ROA of 3.99 and operating margin of 4.9) and Gerdau (ROA of 3.04 and operating margin of 6.91). While lower than its peers, it is not so far from its competitors that it should be easily dismissed. The company could make for a good growth story if positioned in the right place at the right time against its larger peers.
Final thoughts: Let's keep the party going
CMC seems to be positioning itself well for future growth. Being involved in both the growing domestic and international markets makes CMC a company that looks to improve on its position and stabilize earnings. The company certainly has its work cut out for it in capitalizing on future growth and improving on its margins in the face of declining prices and foreign imports. Despite its problems on the eve of its 100-year birthday party, however, expect the "after party" to only get better.