Morningstar | Commercial Metals Closes out Its Fiscal 2018 With Impressive 4Q Results; FVE Unchanged at $18. See Updated Analyst Note from 25 Oct 2018
Commercial Metals reported encouraging fourth-quarter results as its U.S. and Poland steel mill operations delivered strong profits amid favorable steel market conditions. Having updated our valuation model, our fair value is unchanged at $18 per share. Our no-moat rating also remains intact.In the days preceding the company's earnings report, its market price briefly dipped below our fair value estimate. This made Commercial Metals the first U.S. steelmaker we cover to be undervalued since early 2016. Shares rallied sharply, however, after the earnings release and the stock is now once again overvalued. Over the long-run, we are still encouraged that Commercial Metals' production footprint across the U.S. sun belt will help support healthy demand amid growing nonresidential construction activity. Indeed, the company's Americas Mills segment has been churning out high profits thanks, in part, to lower import levels. Accordingly, the company has benefited meaningfully from the Trump Administration's steel tariff program.
However, although shipment volumes should continue to grow in the coming years, we remain cautious about margins. We expect metal margins to contract as steel prices decline. Fortunately, the impact of lower metal margins will be largely offset by the company's significant fabrication operations, for which steel prices are the key input cost. Indeed, Commercial Metals' fabrication scale will increase further when its recent $600 million acquisition of rebar and fabrication assets from Gerdau closes later this year.
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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