Commercial Metals (CMC) steels itself for 3Q results

Commercial Metals Company (NYSE: CMC) recycles and re-manufactures various types of steel and metal products. While demand for its products is booming, particularly demand for rebar, the price the company must pay per ton of material to be recycled and re-manufactured increased far beyond the price increases the company can charge for its manufactured products. The company's margins are being squeezed, particularly in longer term fixed-price contracts that did not factor in the possibility of a 92% rise in raw alloy prices and a 33% increase in energy costs. Commercial Metals also uses LIFO (last in first out) as its inventory costing method. LIFO is meant to eliminate inflationary profits from net income and give a truer picture of a company's costs and profits.

In 3Q Commercial Metals had "unforeseen" LIFO expenses totaling $83 million or $0.71 per share, reducing actual EPS to $0.51, still above the company's EPS range of $0.31-$0.41. 3Q net earnings totaled $59.5 million compared to 3Q 2007 net earnings of $99.4 million. The company also racked up an SAP system reengineering expense of $18 million for the quarter, and $43 million for 1-3Q 2008.

The good news is that overall sales volumes increased 10%, spread between domestic and international productions. Markets for recycled and re-manufactured steel and metal products remain strong in Germany, Australia and the Middle East. China is reducing the tonnage of steel and rebar available for export, which further helps to keep demand strong and prices high in the Asian markets. Trading at just under $40 per share, this industrial stock could be a viable investment. But investors may need to be a CPA to figure out the balance sheet. Citigroup downgraded the stock from Buy to Hold due to the economic stresses in the manufacturing sector and the company's inventory costing method.