Commercial Metals Shares Overvalued After 200% Surge Since 2020

Commercial Metals Company's stock has returned 200% since July 2020, but has failed to break out above $60 three times in the past 15 months, indicating overhead technical resistance. The company's recent earnings report showed declining margins and shipments, leading analysts to consider the stock overvalued.

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Aqsa Younas Rana
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Commercial Metals Shares Overvalued After 200% Surge Since 2020

Commercial Metals Shares Overvalued After 200% Surge Since 2020

Commercial Metals Company (NYSE: CMC) shares have returned approximately 200% since July 2020, when analysts initially gave a "Buy" signal on the stock. The company's valuation, technicals, and growth path supported the bullish thesis at the time, with shares almost reaching $60 in March 2022.

However, the stock has failed to break out above $60 three times in the past 15 months, indicating overhead technical resistance. The MACD technical indicator on the weekly chart is also showing a divergence, suggesting a potential reversal in the stock's upward trend.

Why this matters: The overvaluation of Commercial Metals' shares has broader implications for the stock market, as it may indicate a correction in the metals sector. If the company's growth trajectory continues to slow, it could have a ripple effect on the entire industry, impacting investors and the economy as a whole.

Commercial Metals' recent second-quarter earnings report showed some concerning trends, with declining margins and shipments in its key North America and Europe segments. "Adjusted EBITDA came in well down, with adjusted EBITDA margin dropping to 15%," the report noted. Steel shipments increased slightly in the US, but margins were impacted by elevated commissioning costs.

In Europe, no growth was reported, with shipped steel, adjusted EBITDA, and adjusted EBITDA margin all down compared to the same period 12 months prior. The company's Emerging Businesses Group saw a slight jump in net sales, but erosion in EBITDA margin due to weather upheaval and project delays.

Analysts now consider Commercial Metals' stock overvalued, with the price-to-sales ratio, enterprise value-to-sales ratio, and price-to-book ratio all indicating a high valuation compared to historical averages. The company's return on capital profitability metric of 10.93% is also trailing its 5-year average of 12.71%.

Technical charts show a lack of volume support for the stock's recent move out of April lows, suggesting minimal gains are likely in the near term as the shares come up against resistance. The low dividend yield of 1.26%, which trails the 5-year average of 1.78%, also provides little incentive for shareholders to hold on if growth concerns persist and the stock consolidates.

Given Commercial Metals' growth headwinds, declining margins, and overvalued stock price, analysts believe now is an opportune time for investors to take profits. The company faces challenges to maintain its growth trajectory, and the technical picture indicates the stock may be due for a pullback after its impressive multi-year run. While still a solid company, Commercial Metals' shares appear to have gotten ahead of its underlying fundamentals.

Key Takeaways

  • Commercial Metals Company's stock has returned 200% since July 2020, but faces overhead technical resistance.
  • The MACD technical indicator shows a divergence, suggesting a potential reversal in the stock's upward trend.
  • Recent earnings report shows declining margins and shipments in key segments.
  • Analysts consider the stock overvalued, with high price-to-sales and enterprise value-to-sales ratios.
  • Now may be an opportune time for investors to take profits due to growth headwinds and overvaluation.