Morningstar | Commercial Metals' U.S. and Poland Mill Operations Continue to Churn Out Impressive Profits
Commercial Metals shares traded lower after the company reported its fiscal first-quarter results. Although profits remained elevated from the same period in recent years, investors were hoping for better results amid near-record metal margins and a healthy demand environment. Adjusted EBITDA of $97.7 million rose modestly from $92.9 million year on year but declined sequentially from $123.6 million in the fourth quarter. Having updated our valuation model, our $18 per share fair value estimate and no-moat rating are unchanged for Commercial Metals.Fiscal 2019 will prove to be a transitional year for the company. Commercial Metals will continue to integrate the mill and fabrication assets recently acquired from Gerdau, ramp up its new Oklahoma mill, and proceed with the construction of a new mill in Arizona. Management said all three expansion projects have been proceeding without issue thus far, which is encouraging, given the execution risk associated with pursuing each of these projects simultaneously.
This year, we forecast adjusted EBITDA of $506 million and adjusted earnings of $1.95 per share on $6.1 billion of revenue. Although we expect lower profits over the next five years for most U.S. steelmakers we cover, we forecast that Commercial Metals will grow adjusted EBITDA to $588 million (midcycle) by fiscal 2023. The company remains well-positioned to benefit from healthy nonresidential U.S. construction demand across the U.S. Sun Belt states. Additionally, the company's three expansion initiatives should help improve profitability over time. Shares are trading modestly below our fair value estimate but remain in 3-star territory for now. However, we would need to see a larger discount to fair value before viewing shares as attractive in terms of risk-adjusted return potential.
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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