CSTM Q2 Earnings on Deck: How to Approach the Stock Now?

CSTM’s Earnings Surprise History

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The company delivered better-than-expected results in three of the trailing four quarters while missing the mark in one, the earnings surprise being 77% on average. In the last reported quarter, its earnings of $1.42 per share beat the consensus estimate of 62 cents by 129%.

Earnings Whispers For CSTM

Our proven model does not conclusively predict an earnings beat for CSTM this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here, as elaborated below.

Earnings ESP: CSTM has an Earnings ESP of 0.00% as both the Zacks Consensus Estimate and the Most Accurate Estimate are pegged at 91 cents per share. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.

Zacks Rank: Constellium presently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Driving CSTM’s Performance

The company’s Packaging & Automotive Rolled Products segment is expected to have benefited from higher metal prices. Strong demand for packaging rolled products, reflected in increased order volumes, is also likely to have aided the segment’s revenues. For the second quarter, the Zacks Consensus Estimate for the Packaging & Automotive Rolled Products segment’s total sales is pegged at $1.61 billion, indicating a 9.1% increase sequentially.

Higher shipments of aerospace and transportation, industry and defense (TID) rolled products are expected to have supported the Aerospace & Transportation segment’s performance in the to-be-reported quarter. The consensus mark for the segment’s revenues is pegged at $655 million, indicating a 7.6% rise sequentially.

Higher metal prices are likely to have aided Constellium’s Automotive Structures & Industry segment’s revenues in the second quarter. The consensus mark for the Automotive Structures & Industry segment’s revenues is pegged at $419 million, indicating a 1% rise sequentially.

However, the escalating cost of sales due to higher input costs poses a threat to CSTM’s bottom line. Also, given the company’s extensive geographic presence, its operations are subject to global political risks and foreign exchange headwinds. A stronger U.S. dollar is likely to have hurt Constellium's overseas business in the to-be-reported quarter.

Price Performance

CSTM’s shares have surged 25.9% in the past six months against the Zacks Metal Products - Distribution industry’s 16.9% decline. The company’s shares have also fared better than the S&P 500’s increase of 5.2%. Its peers, Alcoa Corporation AA and Ryerson Holding Corp. RYZ, have declined 26.3% and gained 11.8%, respectively, in the same period.

Six-Month Price Performance

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CSTM’s Valuation Remains a Headwind

CSTM is currently trading at a forward 12-month P/E of 9.56X, a premium compared with the industry’s 8.13X. In comparison with Constellium’s valuation, its peers, Alcoa is trading lower and Ryerson Holding is trading higher. AA and RYZ are trading at 7.22X and 18.13X, respectively.

Price-to-Earnings (Forward 12 Months)

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Investment Thesis

Constellium is expected to have benefited from healthy demand for packaging rolled products and increased TID rolled product shipments in the second quarter. Also, rising aluminum prices, driven by geopolitical tensions between Israel and Iran, have been supporting domestic producers like CSTM. Disruptions in the Strait of Hormuz, a key Middle Eastern shipping route, have tightened regional supply. As a result, global aluminum prices have increased, benefiting major industry players such as Constellium.

Should You Buy CSTM Now?

Strong demand in the packaging and aerospace markets and a favorable metal pricing environment position CSTM favorably for strong second-quarter results. However, the near-term challenges, such as rising operating costs & expenses, are limiting the company’s near-term prospects. 

The expensive valuation warrants a cautious approach for existing investors. Potential investors should consider waiting for CSTM's earnings report and clearer signs of recovery before investing in the stock.

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This article originally published on Zacks Investment Research (zacks.com).

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