Expansion And Operational Initiatives Will Strengthen Future Prospects

Key Takeaways

• Strategic projects and initiatives like the Arizona 2 facility and TAG program are set to boost capacity and margins, driving future growth.
  
• Robust demand for steel, supported by construction and infrastructure investments, indicates potential for increased revenue and long-term earnings growth.
  
• Economic uncertainty, competition, and excess steel supply present challenges to CMC’s profitability, with potential impacts from litigation and market hesitancy.

Catalysts

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

• CMC’s Arizona 2 facility and Steel West Virginia site are strategic projects that are expected to increase production capacity, with the Arizona facility set to reach nameplate capacity of 500,000 tons annually, which could drive future revenue growth as market conditions recover.
  
• The company is executing over 150 initiatives under its “Transform, Advance and Grow” (TAG) program aimed at operational and commercial excellence, which are projected to sustainably improve through-the-cycle margins through cost reductions and process improvements.
  
• Demand for finished steel products in North America remains robust with construction activity rebounding, indicating potential for increased revenue and earnings as favorable weather allows projects to catch up and economic uncertainties begin to fade.
  
• Positive indicators from the Dodge Momentum Index and customer conversations suggest a solid pipeline of construction projects, which could lead to increased steel shipments and higher revenue, particularly as infrastructure investments and reshoring drive demand.
  
• The company’s strategic focus on organic and inorganic growth, including new ventures in high-margin early-stage construction segments and the anticipated benefits from segmentation expansion, could enhance earnings and provide new sources of revenue over the long term.

Commercial Metals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Commercial Metals's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 8.6% in 3 years time.
• Analysts expect earnings to reach $769.5 million (and earnings per share of $4.26) by about January 2028, up from $133.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 41.6x today. This future PE is greater than the current PE for the US Metals and Mining industry at 15.6x.
• Analysts expect the number of shares outstanding to grow by 16.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Commercial Metals Future Earnings Per Share Growth

Risks

• CMC reported a net loss for the first quarter of fiscal 2025, primarily due to a significant litigation expense, which, if repeated or upheld, could impact future earnings.
  
• Economic uncertainty and construction market hesitancy have pressured steel pricing and margins in North America, potentially affecting revenue growth.
  
• Increased competition for fewer new construction projects, leading to pressure on steel pricing and margins, could impact CMC's profitability.
  
• The influx of excess steel material from Germany into Poland has pressured margins despite improving economic conditions, potentially affecting the Europe Steel Group's earnings.
  
• CMC's Emerging Businesses Group has experienced softening profitability due to temporary factors, but persistent issues or further project delays could continue to impact net margins.

Valuation

• The analysts have a consensus price target of $61.62 for Commercial Metals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $53.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.0 billion, earnings will come to $769.5 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $48.89, the analyst's price target of $61.62 is 20.7% higher.
  
• 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.