Monday, February 4, 2008


February 4, 2008

Call options on Commercial Metals Company (CMC) saw two days of heavy trading last week on rumors that Nucor (NUE) is eying the company. The talk surfaced on Thursday and pushed shares up $1.57 to $28.36. The next day, the stock rose another 77 cents to $29.13. Heavy call buying accompanied the two-day 8.75 percent gain and, given the recent trends in the industry, speculation about a takeover of Commercial Metals might have some merit.

Headquartered in Irving, Texas, Commercial Metals Company recycles, manufactures, and sells metal and steel products. The company employs almost 13,000 workers and has a network of locations around the globe. With less than 120 million shares outstanding, it has a relatively modest market cap of $3.4 billion, especially when compared to sales. Commercial Metals generated more than $8.3 billion in revenues in the fiscal year ended August 31, 2007.

As with many companies in the steel industry, shares of Commercial Metals have been in a bull market for several years. Figure 1 shows the weekly action in the share price. During the past four years, the stock has quadrupled in value. However, since mid-July of last year, shares of most steel and metal companies have been trading lower on worries about the global economic outlook. CMC is down more than 22 percent from its record high of $37.15.

Figure 1: CMC Weekly Chart

Since mid-January, shares of the metals company have been doing a bit better. In fact, last week, CMC rallied 13.9 percent. A big chunk of those gains came on Thursday, when the stock rose 5.9 percent. According to, the strength in the stock was attributed to speculation that Nucor might be interested in acquiring Commercial Metals.

Nucor is a Charlotte, North Carolina-based steel company that boasts a market value of more than $17.15 billion, or five times bigger than CMC. It could acquire Commercial Metals to take advantage of the company’s strong revenues. CMC currently generates more than $70 in sales per share. In addition, another merger in the steel sector seems likely given the recent trends in the industry. For example, US Steel (X) recently took over Lone Star Technologies and Sweden''s SSAB''s bought out metals company Ipsco. Major players in the industry have been looking for ways to cut costs and become more efficient through acquisitions. It seems likely that more mergers will be announced and an acquisition of CMC is one realistic possibility.

Some options traders seem to agree. As evidence, call volume surged as the rumors made the rounds. On Thursday, 31,739 call options traded, compared to only 1,910 puts. On Friday, the action continued. Almost 18,000 call options traded on the day, compared to 1,443 puts and average daily volume (puts and calls) of less than 800 contracts. A lot of the action involved short-term contracts that expire in February or March. However, the June contracts also saw a noticeable increase in activity, with more than 18,000 contracts crossing the tape on Thursday. The heavy buying seems to suggest that options traders expect a deal to be announced, but aren’t certain about the timing. As a result, these speculators are buying the June options in anticipation that something will happen at some time during the first half of the year.

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