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Commercial Metals Could Get Welded

Further consolidation in the global steel industry is in the cards, argues Standard & Poor's analyst Leo Larkin. "Sharply rising costs for raw materials, such as iron ore and ferrous scrap, are exerting pressure to merge," he says. Steel producers need to expand, he notes, to obtain more favorable contracts from ore miners. One potential target, according to Larkin, is Commercial Metals (CMC), which makes and recycles steel and other metals. It has attractive assets in steel production, fabrication, and scrap recycling. In the U.S., Nucor (NUE) and U.S. Steel (X) are likely purchasers, he says. Larkin rates CMC a "buy" and sees it earning $2.54 a share in 2006 and $2.80 in 2007, vs. $2.31 in 2005. Andrew Schmeidler of investment outfit AR Schmeidler, which owns shares, says CMC stands out because it's undervalued, based on assets. The stock hit 31 in May but has slid to 22.89. It could rise to 35 in 18 months, Schmeidler says. A CMC spokeswoman said executives could not be reached for comment.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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