Morningstar | CMC Updated Forecasts and Estimates from 20 Jun 2019
We've increased our near-term profit outlook for Commercial Metals in light of the company's strong third-quarter results. However, with our long-term outlook unchanged, our $18 fair value estimate remains intact. We also reiterate our no-moat rating. The shares traded sharply higher after the favorable earnings release; although they are still trading below our fair value estimate, we don't see attractive risk-adjusted upside potential, given our high uncertainty rating.We were impressed by an improvement in adjusted EBITDA for the flagship Americas mills steelmaking segment. Americas mills' adjusted EBITDA of $158 million grew 41% sequentially and 77% year on year. Results for the Americas recycling and international mill operations were steady.
The main area of concern regarding Commercial Metals' broader asset portfolio remains heavy losses from its fabrication operations. The dramatic decline in fabrication profitability this fiscal year stems in part from losses generated by the fabrication assets acquired from Gerdau. However, these operations are now booking higher prices, and headwinds associated with unfavorable contracts will be rolling off the books. We believe management's guidance that the fabrication segment will restore profitability next year will be achieved.
Although we expect profits to fall in 2020 for most U.S. steelmakers, the ongoing integration of the assets acquired from Gerdau should help Commercial Metals'Â profits rise next year. In fact, we forecast a roughly 10% adjusted EBITDA margin in fiscal 2020 versus our estimate for 8.3% in 2019.
Commercial Metals, together with its subsidiaries, manufactures, recycles and markets steel and metal products, related materials and services. The company has four reportable segments: Americas Recycling, which processes scrap metals for use as a raw material by the company and other manufacturers of new metal products; Americas Mills, which operates electric arc furnace (EAF) mini mills, EAF micro mills, rerolling mill, scrap metal shredders, and scrap metal processing facilities; Americas Fabrication, which includes warehouses that sell or rent products for the installation of concrete; and International Mill, which consists of an EAF mini mill, recycling and fabrication operations located in Poland.
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