Whether the long-term pattern of Commercial Metals (CMC) is a symmetrical triangle or an ascending triangle, the outcome looks like it is going to be the same – a bullish breakout. Bullish triangles are always associated with higher lows. Furthermore, the excellent recovery shares have made since printing those sub-$12 lows leads us to believe that more gains are on the cards here.

In the recent third quarter, management announced EPS of $0.59 which turned out to be a comprehensive earnings beat of $0.28. CEO Barbara Smith stated that the third quarter was 100% impacted by the coronavirus pandemic. Therefore, from an investor’s standpoint, it was good to see the downward trend of earnings numbers being stopped in the third quarter. A sequential bottom-line beat ($0.59 vs. $0.53) was reported in Q3.

This means that over the past four quarters, CMC’s Return on Equity comes in at 17.7% and its Return on Assets comes in at 7.72%. Net margin over the same period now surpasses 5.31%. We have not seen such strong profitability metrics in this firm for quite some time. Moreover, with shares currently trading with a low trailing earnings multiple of 8.25, investors are invariably going to be attracted to this name.

Strong profitability and a keen valuation are hallmarks of the value-based approach. Another key area, though, is how shareholders have been getting compensated. CMC presently pays out a forward dividend of $0.48 which currently equates to a yield of 2.36%. The state of the key dividend metrics many times informs us how fundamentally strong a company really is. Let’s start off with growth and affordability.

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CMC has kept its quarterly payout the same at $0.12 since early 2008. The lack of dividend growth may definitely be a cause of concern to the long-term investor. We state this because of how inflation can affect long-term gains. For example, when there is no growth in the respective dividend, more emphasis needs to be placed on how the respective share price of the firm performs over the long term. Investors, for example, who bought close to the top in 2008 could still be down on their investment due to the absence of dividend growth during this time frame. This is certainly something to think about for long-term plays.

With respect to affordability, there is no such issue. Over the past four quarters, the company generated $787 million of operating cash flow of which $278 million was generated in the most recent quarter. This enabled the firm pay down a significant chunk of debt over the past 12 months as well as pay $57 million towards the dividend. Furthermore, the cash balance increased by $342 million to currently sit at $464 million.

The trend looks favourable here also when we look at the past four quarters as operating cash flow always never dipped below $100 million. Suffice it to say, we definitely are now seeing the fruit of the 2018 purchase of US assets from Gerdau.

To get another insight on how the payout will fare going forward, we go to how the interest coverage and debt to equity ratios have been trending. Over the past four quarters, for example, CMC’s interest coverage ratio rose to 6.9 which is the highest number we have seen at the firm for quite some time. The higher the interest coverage ratio, the lower interest payments are as a percentage of the company’s EBIT. A favourable trend here is beneficial to the dividend in the long run.

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Management touched on its debt position in the third quarter and how solid its bonds were trading in the market. Net debt came in at 1.2 times EBITDA at the end of Q3 and the interest-bearing debt to equity ratio came in at 0.64. Again, we see a solid favourable trend here not just in how debt has been decreasing but also how the firm’s cash position has been increasing. In fact, when we subtract cash from both short- and long-term debt, we get a net debt figure of $709 million.

Therefore, to sum up, there is a lot to like in Commercial Metals at present. The amount of cash flow the firm is spinning off at present points to a bright future for the firm. Let’s see what the fourth quarter brings.


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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.

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