Analysts at UBS have initiated coverage on Commercial Metals Company (NYSE:CMC) (CMC) with a ‘Buy’ rating on their belief that the steel and reinforcing bar (rebar) producer is well positioned to benefit from infrastructure investment growth.
“Infrastructure projects will have a material impact on rebar consumption on the back of US$550 billion in new Federal investment from the Infrastructure Investment and Jobs Act (IIJA) in 2021 and about US$800 billion from the Inflation Reduction Act (IRA) and CHIPS in 2022,” the analysts wrote in a note to clients.
They forecast 2 to 2.5 million tons per annum of US rebar consumption growth by 2026, representing a more than 20% potential upside for rebar and a 7% potential upside for long steel.
They estimated that up to 2.5 million tons per annum of demand growth would come from 1.5 million tons per annum IIJA spending on highways and transportation, 0.5 million tons per annum from accelerating wind turbine installments and other clean energy benefits, and 0.5 million tons per annum from chip fabs and manufacturing reshoring.
“Rebar intensity for infrastructure projects is four to six times higher than for residential buildings and non-residential buildings (i.e. commercial and office),” they wrote.
“While rebar consumption may decline in residential and non-residential buildings due to higher near-term interest rates, we expect infrastructure rebar demand growth, especially in highway projects, to more than offset those declines.”
CMC can capture about 50% of this additional rebar demand with its new capacity expansion of 1 million tons of incremental annual steel shipments by the 2026 financial year compared to the 2022 financial year, the analysts wrote.
They also noted that their ‘Buy’ rating was supported by CMC’s multi-year domestic rebar shipment growth, sustainable high margins, and an attractive valuation.
They awarded the stock a US$63 price target. CMC shares traded hands at US$54.22 on Tuesday.
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