Why Commercial Metals Company Stock Just Jumped 7%

What happened

Shares of steelmaker Commercial Metals Company (NYSE: CMC) soared as much as 9.5% on the first day of trading in the new year, before settling back to enjoy a 6.8% gain by the time of the closing bell. All of this appears to be a result of CMC's announcement Tuesday morning that it has entered into a definitive agreement to acquire 33 rebar fabrication facilities and four steel mills from Brazilian rival Gerdau S.A. (NYSE: GGB).

So what

Commercial Metals Company is buying the rebar factories and steel mills, located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey; and Rancho Cucamonga, California, for $600 million in cash. After the deal closes, CMC says it will have "approximately 7.2 million tons of global melt capacity" for steel recycling and improved "strength in concrete reinforcing products" -- "located in the largest construction regions in the U.S."

Molten steel pouring in a factory

Image source: Getty Images.

Now what

Valuation-wise, it's hard to say whether CMC is getting a good price on these assets. The company did not give an estimate for annual sales or profits from the facilities being acquired. Management did say, however, that it expects the transaction to generate "approximately $40 million in pre-tax operational synergies annually" and "to be accretive to earnings and cash flow within the first year after the transaction closes."

Investors should hope this proves to be the case. Currently, Commercial Metals Company's profits are pretty weak, with net profit margins running at just 1% over the past 12 months' performance -- resulting in a valuation of the stock of 58.8 times trailing earnings. That seems like a lot to pay for a commodity producer -- even one growing as fast as CMC is now set to do.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.