Commercial Metals Company (NYSE:CMC) fiscal Q4 earnings report sparked a 3.0% decline in the stock that we think irrational. The move was sparked not so much because the company posted weak results but because results were a slim margin below the analyst’s consensus. While missing the consensus is not a good thing for a company or its stock price there’s “missing consensus” and then there’s giving a bad report and the two are not the same. In this case, the Commercial Metals report is not only good but comes with a favorable outlook and greatly improved capital allocation program that should help keep this stock moving higher over the mid to long term.
Commercial Metals Misses Consensus Estimates
Commercial Metals missed the consensus estimates but that is the only bad thing we can say about the report. The company’s $2.03 in consolidated revenue is up 44% despite missing the consensus figure by a mere 50 basis points. The gain was driven by greatly improved margins for steel that drove revenue up 31% on a two-year basis to set a new all-time high as well. Margin per ton is up to $41 in North America and $39 in Europe but still down versus last year.
Regardless, the company’s earnings were strong as well coming in at $1.24 GAAP and $1.26 adjusted. Both the GAAP and adjusted earnings are up versus last year with adjusted earnings outpacing revenue by 1500 basis points. The bad news, again, is that GAAP and adjusted EPS both fell short of the Marketbeat.com consensus.
Looking forward, the company is expecting strength to continue. The company says full-year 2022 results should be “strong” and supported by continued demand as well as resupply efforts. More importantly, the company’s backlog is expected to grow and reprice higher as metal prices increase. Although the fiscal 1st quarter volumes are expected to follow seasonal patterns and decline sequentially, YOY growth is expected for the year.
Commercial Metals Increases Capital Return
Commercial Metals foreshadowed its great results by not only increasing the dividend but the share buyback allotment as well. The company increased the dividend by 17% to $0.56 annually which is good for a yield of 1.75% with shares trading near $31.25. That’s not what we call a high yield but it is well above the broad market average and much, much safe. The payout ratio is a low 15% of earnings and cash flow is growing. The balance sheet is carrying a moderate amount of debt but coverage is sufficient to sustain the new payout and fund future growth efforts so we are not worried. As for the debt, debt levels have been coming down as well so we see balance sheet improvement in future quarters.
As for the repurchase allotment, the company suspended the remaining $27 million on the previous authorization and replaced it with new authorization for $350 million. This is worth about 9% of the market cap and will surely help keep share prices above $30 if not moving higher.
The Technical Outlook: Commercial Metals Supported With A Range
Shares of Commercial Metals have been trading within a range for some time now and appear to be well-supported. The fiscal Q4 results have price action lower than in the previous session but even now it appears as if the stock is well supported. Assuming price action can regroup at or near this level we see it continuing to move sideways if not edge higher over the next few months. The risk is that resistance at $33.50 or $34 will keep price action from moving much higher until systemic global headwinds abate.
CMC has been the topic of several recent research reports. BMO Capital Markets raised their price target on Commercial Metals from $26.00 to $32.00 and gave the company a "hold" rating in a report on Thursday, July 1. Goldman Sachs upgraded Commercial Metals from a "sell" rating to a "neutral" rating and raised their price target for the company from $31.00 to $33.00 in a report on Wednesday, Oct. 6. Zacks Investment Research cut Commercial Metals from a "buy" rating to a "hold" rating and set a $34.00 target price on the stock. in a report on Thursday, Sept. 2. Deutsche Bank Aktiengesellschaft upgraded Commercial Metals to a "hold" rating and raised their target price for the stock from $32.00 to $36.00 in a report on Wednesday, Sept. 15. They noted that the move was a valuation call. Finally, JPMorgan initiated coverage on Commercial Metals in a report on Wednesday, June 16. They set a "neutral" rating and a $39.00 target price on the stock. One research analyst has rated the stock with a sell rating and eight have issued a hold rating to the company. Based on data from MarketBeat, Commercial Metals presently has a consensus rating of "Hold" and an average target price of $29.50.
The company has a market cap of $3.73 billion, a price-to-earnings ratio of 11.42 and a beta of 1.30. The company has a debt-to-equity ratio of 0.47, a current ratio of 2.95 and a quick ratio of 1.97. The stock has a 50-day moving average price of $32.18 and a 200 day moving average price of $31.42.
The company also recently announced a quarterly dividend, which will be paid on Wednesday, Nov. 10. Investors of record on Wednesday, Oct. 27 will be given a $0.14 dividend. This represents a $0.56 dividend on an annualized basis and a yield of 1.81%. The ex-dividend date is Tuesday, Oct. 26. This is a positive change from Commercial Metals's previous quarterly dividend of $0.12. Commercial Metals's dividend payout ratio (DPR) is currently 18.18%.
About Commercial Metals
Commercial Metals engages in the manufacture, recycling, and marketing of steel and metal products. It operates through the following segments: North America and Europe. The North America segment is a vertically integrated network of recycling facilities, steel mills and fabrication operations. The Europe segment is a vertically integrated network of recycling facilities, an EAF mini mill and fabrication operations located in Poland.