In my opinion, Commercial Metals Company (NYSE:CMC) is an excellent combination of superb value and a healthy growth dividend stock. Despite ongoing pressure from steel import activity into the U.S. and continued weakness in the scrap markets, the Americas Fabrication segment was able to expand average metal margins in the last quarter by 3% compared to the same quarter a year ago.
Company Overview (from the company's website)
Since 1915, Commercial Metals Company has manufactured, recycled and marketed steel and metal products and related materials and services through a network including steel minimills, steel fabrication and processing plants, construction-related product warehouses, metal recycling facilities and marketing and distribution offices in the United States and in strategic international markets. CMC is an efficient, high quality, low-cost producer.
On January 05, Commercial Metals reported its first quarter fiscal 2016 financial results that was in-line with expectations. The company significantly missed expectations in the last quarter of fiscal 2015 after considerably beating estimates in its two previous quarters, as shown in the table below.
Source: Yahoo Finance
Earnings from continuing operations for the first quarter of fiscal 2016 were $25.6 million ($0.22 per diluted share), compared with earnings from continuing operations of $34.3 million ($0.29 per diluted share) for the first quarter of fiscal 2015.
In the report, Joe Alvarado, Chairman of the Board, President and CEO, commented:
Our results for the first quarter of fiscal 2016 were generally consistent with our outlook from last quarter. Our Americas Fabrication segment achieved a $25.5 million improvement in adjusted operating profit during the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 benefiting from lower steel input prices and solid construction demand. In addition, compared to the same quarter in the prior year, our Americas Mills segment was able to expand metal margins as finished steel prices declined at a slower rate than ferrous scrap prices. However, our remaining segments continued to be adversely impacted by steel import activity into the U.S., weakness in scrap markets and decreased global demand and pricing for all major commodities. We are very pleased with our financial strength and our strong cash flow of $219.6 million during the quarter.
According to the company, the brightest spot for the first quarter was the performance of its Americas Fabrication segment, which continued to benefit from strong activity in the non-residential and non-building construction markets. During the first quarter of fiscal 2016, non-residential construction spending improved 20% year-over-year and non-building construction spending improved 3% year-over-year. In addition, this segment's metal margins continued to benefit from declining finished steel input pricing shipped against higher priced backlog. The segment was able to expand average metal margins by 3% compared to the first quarter of fiscal 2015 on falling ferrous scrap input costs during the quarter. Furthermore, a key leading indicator, the Architecture Billings Index has reported over 50 for 18 of the last 24 months indicating a construction recovery is still underway. Regionally, the index in the South and West remained well above 50 indicating strength in the markets in which CMC participates actively.
Source: October 2015 Investor Presentation
As for the current quarter, according to the company, its second fiscal quarter has historically been seasonally slower as a result of holiday slowdowns and winter weather conditions, which reduce construction activities. CMC anticipates that market conditions will not improve materially over the short term, due to ongoing pressure from steel import activity into the U.S. and continued weakness in the scrap markets.
Despite adverse impact by steel import into the U.S. driven by a strong US dollar and relatively strong U.S. construction activity, I see continued robust growth prospect for the company. CMC has recorded substantial EPS growth in the last few years. The company's annual average EPS growth over the last five years was high at 29%. After some years of lack of a permanent highway bill in the U.S., the government agreed to a new spending plan under the Fixing America's Surface Transportation Act, or FAST. The company believes that the new highway bill will present CMC with meaningful upside from a demand perspective. Moreover, while imports into the U.S. remained elevated, CMC'S backlogs remain healthy, and bidding activity remains high, although pricing has declined in line with overall depressed finished steel pricing.
On January 4, 2016, the board of directors of Commercial Metals declared a regular quarterly cash dividend of $0.12 per share of CMC common stock. The dividend is payable to stockholders of record as of the close of business on January 19, 2016. The dividend will be paid on February 2, 2016. This cash dividend reflects CMC's 205th consecutive quarterly dividend. The forward annual dividend yield is pretty high at 3.56%, and the payout ratio is only 39.3%. The annual rate of dividend growth over the past ten years was high at 15.4%. However, since 2008 the company has not increased its dividend.
Commercial Metals' financial position at November 30, 2015 remained strong with cash and cash equivalents of $637.2 million, compared to $485.3 million at August 31, 2015, and approximately $1.2 billion in total liquidity. Cash flow from operations was strong at $219.6 million. Pursuant to the share repurchase program that was approved in the first quarter of fiscal 2015, the Company purchased approximately 316 thousand shares of its common stock for $4.6 million during the first quarter of fiscal 2016.
CMC's stock is down 24% from its 52 week high of $17.76 from June 06, 2015.
Chart: TradeStation Group, Inc.
Regarding its valuation metrics CMC's stock is, in my opinion, undervalued. The trailing P/E is very low at 9.84, and the forward P/E is even lower at 8.55. The current ratio is very high at 3.70, and the price-to-free-cash-flow is very low at 11.39. Furthermore, its Enterprise Value/EBITDA ratio is very low at 4.96, and its price-to-sales ratio is extremely low at 0.26.
According to Portfolio123's "Technamental" ranking system CMC's stock is ranked third among all 76 Russell 2000 basic materials stocks.
The "Technamental" ranking system is quite complex, and it is taking into account many factors like; valuation ratios, growth rates, profitability ratios, financial strength, efficiency ratios, technical factors and industry strength , as shown in the Portfolio123's chart below.
Back-testing over sixteen years has proved that this ranking system is very useful.
In my opinion, Commercial Metals is an excellent combination of superb value and a healthy growth dividend stock. Despite ongoing pressure from steel import activity into the U.S. and continued weakness in the scrap markets, the Americas Fabrication segment was able to expand average metal margins in the last quarter. I see continued robust growth prospect for the company. CMC has recorded substantial EPS growth in the last few years, and the new highway bill will present CMC with meaningful upside from a demand perspective. Moreover, while imports into the U.S. remained elevated, CMC'S backlogs remain healthy, and bidding activity remains high. Regarding its valuation metrics CMC's stock is undervalued; the trailing P/E is very low at 9.84, and its EV/EBITDA ratio is also very low at 4.96. Moreover, CMC is generating strong free cash flows; price-to-free-cash-flow is very low at 11.39 and returns value to its shareholders by stock buyback and generous dividend yielding about 3.6%. All these factors bring me to the conclusion that CMC is a smart long-term investment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.