CMC's Strategic Growth Initiatives And Strong Demand Trends Poised To Boost Future Earnings

Key Takeaways

• CMC's innovative mills and infrastructure developments are poised to boost production capacity, positively impacting future revenue and earnings.
  
• Strategic initiatives and market trends in construction are set to enhance CMC's margin profile and long-term earnings growth.
  
• Market and operational challenges may hinder revenue growth and profitability for CMC, with pressures from pricing, economic uncertainty, and high inflation impacting key sectors.

Catalysts

Manufactures, recycles, and fabricates steel and metal products, and related materials and services in the United States, Poland, China, and internationally.

• The advancement of CMC's Arizona 2 mill, a first-of-its-kind micro mill capable of producing both rebar and merchant bar, is expected to reach operational breakeven in early fiscal 2025, with a targeted production run rate of 500,000 tons by year-end 2025, impacting future revenue and earnings positively.
  
• CMC is progressing with key infrastructure developments at their Steel West Virginia site, scheduled for commissioning in late 2025, which is anticipated to enhance production capacity, impacting revenue growth.
  
• The TAG (Transform, Advance, and Grow) initiative is expected to yield meaningful financial benefits and drive permanent improvement in CMC's margin profile, contributing to earnings growth and improved net margins in fiscal 2025 and beyond.
  
• CMC's disciplined approach to capital allocation, including organic growth projects and a strategic plan for inorganic growth in the $150 billion early-stage construction market, is anticipated to broaden its commercial portfolio and improve margins, influencing medium to long-term earnings.
  
• Structural trends in North America's construction market, including infrastructure investment, reshoring of manufacturing, and energy transition initiatives, are expected to drive sustained demand for steel products, positively impacting revenue and earnings as market conditions stabilize.

Commercial Metals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Commercial Metals's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.1% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $544.0 million (and earnings per share of $5.06) by about November 2027, up from $485.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2027 earnings, up from 14.2x today. This future PE is lower than the current PE for the US Metals and Mining industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 1.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Commercial Metals Future Earnings Per Share Growth

Risks

• The performance in CMC's North American Steel Group was negatively affected by weaker market sentiment, leading to decreased long steel pricing and margins, which could impede revenue growth and profitability.
  
• CMC's Europe Steel Group experienced margin pressures due to increased imports from neighboring countries, highlighting challenges in maintaining competitive pricing and margins, thus affecting earnings.
  
• Uncertainty surrounding interest rate reductions and the U.S. presidential election has caused project owners to hesitate, which could lead to reduced construction activity and impact CMC's future revenues and net margins in the short term.
  
• The impact of high inflation on infrastructure spending could reduce the expected boost to rebar demand, leading to potentially lower-than-anticipated increases in revenue from infrastructure projects.
  
• Operational challenges and elevated start-up costs at the Arizona 2 mill, which is crucial for CMC’s strategic growth, could impact the achievement of desired production levels and therefore affect overall earnings growth.

Valuation

• The analysts have a consensus price target of $63.0 for Commercial Metals based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.2 billion, earnings will come to $544.0 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $60.63, the analyst's price target of $63.0 is 3.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.