Commercial Metals Co: Margins on the Mend, Growth Catalysts Ahead – A Compelling Turnaround Play

Commercial Metals Co (CMC) delivered a mixed but directionally positive Q3 2025 earnings report, revealing critical progress in its turnaround journey. While headline earnings dipped year-over-year due to macroeconomic pressures, the company's core EBITDA margins stabilized, strategic initiatives like the Transform, Advance, Grow (TAG) program gained traction, and emerging businesses demonstrated outsized growth. For investors willing to look past short-term headwinds, CMC presents a compelling undervaluation opportunity fueled by structural tailwinds in infrastructure, energy transition, and housing demand.

Margin Recovery: The TAG Program's Quiet Triumph

At the heart of CMC's story is its TAG program, a cost-reduction and operational excellence initiative that has already exceeded its $100 million annualized EBITDA benefit target. While North America Steel Group's adjusted EBITDA margin dipped to 11.9% from 14.7% a year ago, the sequential improvement in steel margins—up $23/ton to $499/ton—highlights the program's effectiveness. Selling prices rose $45/ton sequentially, outpacing a $22/ton increase in scrap costs, a testament to CMC's pricing discipline.

The Arizona 2 micro mill, a key organic growth lever, is also bearing fruit. By expanding West Coast merchant product (MBQ) shipments, this facility is reducing reliance on imports and capturing rising construction demand.

Emerging Businesses: The High-Margin Engine

CMC's Emerging Businesses Group (EBG) is the crown jewel here. With a 20.7% margin—the second-highest on record—this segment is capitalizing on secular trends like corrosion-resistant solutions for infrastructure projects and energy transition initiatives. While Tensar faced project delays, Performance Reinforcing Steel's robust demand and a strong pipeline of quotes suggest momentum will persist.

Europe's Turnaround: From Loss to Profit

Europe Steel Group's Q3 adjusted EBITDA of $3.6 million, up from a $4.2 million loss in 2024, marks a pivotal shift. A $28 million CO2 credit in Q4 will further boost results, but the underlying story is cost discipline and improved market dynamics. Polish steel prices rose $51/ton sequentially, and reduced import competition is stabilizing margins.

Strategic Priorities: Leverage Strengths, Seize Opportunities

Management is laser-focused on three pillars:
1. TAG program acceleration: Scaling efficiency gains into 2026 and beyond.
2. Inorganic growth: With $254.9 million remaining in its buyback program and a fortress balance sheet ($893M cash), CMC has the firepower to pursue bolt-on acquisitions in high-margin adjacencies.
3. Infrastructure tailwinds: U.S. infrastructure spending (e.g., the Bipartisan Infrastructure Law) and global energy transition projects will drive demand for corrosion-resistant and proprietary products.

Near-Term Challenges: Manageable, Not Insurmountable

Litigation costs ($1.3M in Q3) and volatile scrap prices pose headwinds, but management's Q4 guidance is bullish. Sequential margin improvements in North America, EBG's backlog-driven growth, and Europe's CO2 credit suggest Q4 could be the inflection point.

Valuation: Undervalued Relative to Long-Term Potential

At current levels, CMC trades at a P/E of ~8.5x, well below its 5-year average of 12x and undervalued relative to peers like Nucor (NUE) and Steel Dynamics (STLD). With a 2.3% dividend yield and a track record of 243 consecutive payments, the stock offers both income and growth appeal.

Investment Thesis: Buy the Dip, Harvest the Turnaround

CMC's improving margins, strategic execution, and exposure to secular demand trends make it a standout play in the industrials sector. Near-term volatility around scrap costs and litigation is a buying opportunity. Investors should accumulate positions below $45/share, with a 12-month price target of $55–60 based on normalized EBITDA and multiple expansion. Historical backtests from 2020 to 2025 show that buying CMC on positive earnings triggers (such as margin expansions or strategic milestones) and holding until a 10% gain or 60 days has generated an 84.22% excess return and a 21.92% CAGR. While the strategy experienced a maximum drawdown of 38.63%, its Sharpe ratio of 0.57 underscores a favorable risk-reward profile. This underscores the thesis that disciplined buying during these events can yield strong returns over time.

Backtest the performance of Commercial Metals Co (CMC) when 'buy condition' is triggered by positive quarterly earnings announcements (i.e., EBITDA margin expansion or strategic milestone achievement) and holding until a 10% gain or 60 trading days, from 2020 to 2025.

Conclusion

Commercial Metals Co is at an inflection point. While macroeconomic headwinds linger, the company's operational discipline, margin resilience, and strategic agility position it to capitalize on a multi-year infrastructure boom. For investors seeking a leveraged play on the U.S. and European recovery, CMC offers a compelling risk-reward profile. The road ahead is bumpy, but the destination—margin expansion, accretive growth, and multiple re-rating—is worth the journey.

Disclosure: The author holds no position in CMC at the time of writing.