Commercial Metals: Is This High-Yield Stock Worth the Price?

Source: Thinkstock

Source: Thinkstock

Commercial Metals Company (NYSE:CMC) is a moderately high dividend paying stock that has dropped about 15 percent in the last few months, sending the yield to almost 3 percent. Can this accidental high yielder be bought at these levels? To answer this question we must first understand what the business does and how it makes its money to know if it has the sustainable growth needed to be a rewarding investment.

The company itself manufactures, recycles, and markets steel and metal products. It has a few different segments, and I will discuss the performance of each in this article. The company’s Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products through 31 scrap metal processing facilities to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, secondary lead smelters, specialty steel mills, high temperature alloy manufacturers, and other consumers. Its Americas Mills segment operates 5 steel mills that produce reinforcing bars, angles, flats, rounds, small beams, fence-post sections, and other shapes as well as 2 scrap metal shredder and processing facilities. The company’s Americas Fabrication segment operates rebar and structural fabrication, fence post manufacturing plants, construction-related product facilities, and plants that bend, cut, weld, and fabricate steel. Its International Mill segment is engaged in mill, recycling, and fabrication operations through 2 rolling mini mills that produce reinforcing bar and merchant products.

Finally, the company’s International Marketing and Distribution segment is involved in the sale, distribution, and processing of steel products, industrial minerals, ores, metal concentrates, ferroalloys, and other industrial products to manufacturers in the steel, nonferrous metals, metal fabrication, chemical, refractory, construction, and transportation businesses. Now that we understand how the company operates, we begin to realize it is a company that relies on two things: higher metal prices and strong economic activity. While the latter is debatable, metal prices have been under pressure for some time. How has this impacted the business?

Well, in its most recent quarter, net earnings attributable were $23.6 million, or $0.20 per diluted share, on net sales of $1.8 billion. This compares to net earnings of $19.0 million, or $0.16 per diluted share, on net sales of $1.8 billion in the comparable prior-year quarter. Results for this year’s third-quarter included after-tax income of $5.3 million ($0.04 per diluted share), compared with after-tax income of $10.7 million ($0.09 per diluted share) for the third-quarter of fiscal 2013, an unfavorable change of $5.4 million ($0.05 per diluted share.) Adjusted operating profit was $57.2 million for the third-quarter of fiscal 2014, compared with adjusted operating profit of $55.8 million for the prior year’s third-quarter, so there was some growth here. Adjusted EBITDA was $90.0 million for the third-quarter of fiscal 2014, compared with adjusted EBITDA of $89.3 million for the prior year’s third-quarter. Very minimal growth indeed, although a year ago, share prices were essentially the same. But how is each segment performing?

Well, first its Americas Recycling segment recorded adjusted operating loss of $1.1 million compared with adjusted operating profit of $3.2 million last year. Although ferrous and nonferrous shipments increased 1 percent and 4 percent, respectively, a $1.0 million unfavorable change in pre-tax income and an increase in employee related expenses accounted for the decline in adjusted operating profit when compared to last year. Its Americas Mills segment was much more favorable. It recorded adjusted operating profit of $74.1 million compared with adjusted operating profit of $46.6 million for the prior year’s quarter. The increase was due to tons shipped increasing by 94 thousand tons while the average cost of ferrous scrap consumed decreased $3 per short ton when compared to last year, resulting in a $15 per short ton increase in average metal margin. Rounding out the American segments, its Americas Fabrication segment recorded adjusted operating profit of $1.2 million compared with adjusted operating profit of $13.5 million last year. The decline in adjusted operating profit is primarily due to margin squeeze as input prices increased, partially offset by an increase in shipments.

Turning to the international markets, the year-over-year change was mixed. Its International Mill segment recorded adjusted operating profit of $2.0 million compared with adjusted operating loss of $3.8 million for the prior year’s quarter. While tons shipped were relatively stable for the current quarter when compared to the same quarter in the prior year, sales prices increased by $28 per short ton and the cost of ferrous scrap consumed decreased by $3 per short ton, resulting in a 13 percent increase in metal margin, which contributed to the improved operating results. However, the International Marketing and Distribution segment recorded adjusted operating profit of $1.5 million compared with adjusted operating profit of $7.7 million for the prior year’s quarter. Joe Alvarado, Chair of the Board, President, and CEO, stated:

The results for the third-quarter of fiscal 2014 were lifted by seasonal construction activity. We are particularly pleased with the strong results from our Americas Mills segment which recorded the best quarterly adjusted operating profit since our first quarter of fiscal 2009. During the third-quarter of fiscal 2014, we successfully commissioned a new electric arc furnace in Poland. Although final commissioning and debugging is ongoing, we saw positive preliminary results. In June 2014, we acquired a small recycling facility. This acquisition is consistent with our vertically-integrated manufacturing model and will provide a low cost, reliable source of raw material to our steel mill in Seguin, Texas.

According to the CEO, construction activity is picking up. This is exactly what the company needs. As a stock, the technical look bad, but these can be overcome by strong fundamentals. The company’s financial position remains incredibly strong with cash and cash equivalents of $437.2 million and approximately $1.0 billion in total liquidity, compared with cash and cash equivalents of $378.8 million and total liquidity of $1.1 billion last year. Further, the dividend remains intact and this yield is a strong draw to a beaten down stock. The dividend yield can help create a floor in the share price as the more the shares decline the higher the yield, increasing the stock’s attractiveness on the way down. It think as this stock approaches $16 it is looking better as an addition to the industrial/metals section of your portfolio, as the yield will be north of 3 percent.

Disclosure: Christopher F. Davis holds no position in Commercial Metalsand has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on the stock, provided it pulls back to $16. Longer-term he has a $21 price target.

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