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Commercial Metals Company (CMC), United States Steel Corporation (X): Be Careful With China

Concerns regarding China’s slowdown in economic growth are hitting several sectors in the stock market. Coal and steel stocks are the most affected because China is a main importer of both commodities. On July 15, China’s GDP growth was estimated at 7.5%. However, steel production slowed down. This prompts for the evaluation of stocks that have a high exposure to Chinese markets to determine if they can still bring capital appreciation to their investors.

Commercial Metals Company (NYSE:CMC)

Concerns about steel demand

United States Steel Corporation (NYSE:X) is a main producer of flat-rolled and tubular steel products. The company trades with a P/E of 229. Its revenues fell by 10% to $4.5 billion, but its net loss shrunk from $219 million to $73 million. Its free cash flow at the end of the quarter declined by 50% to $117 million.

The company may have issues returning to profitability in the near future. China is the main importer of steel in the world. However, it is also a large producer of steel. The problem that United States Steel Corporation (NYSE:X) faces is that the supply of steel is still high since China recently reported a surplus of the commodity.

On top of that, EPS estimates have been revised down by analysts from a profit of $1.56 per share, to a loss of $0.57 per share. Earnings for 2014 were also revised down from $2.63 per share to $1.30 per share.

As long as the demand for steel remains weak, United States Steel Corporation (NYSE:X) will have issues turning back to profitability. Therefore, investors should steer away until economic data points toward higher steel demand.

Commercial Metals Company (NYSE:CMC) recycles, manufactures, and fabricates steel and other metal products. It trades with a P/E of 19.3. According to its most recent earnings report, revenues fell by 10% to $1.74 billion, and its net income shrunk by half from $41 million to $19 million.

Commercial Metals Company (NYSE:CMC) issued $300 million of senior notes due in 2023 to redeem senior notes due in November 2013.

What puzzles me is that the recycling business’ revenues are also declining to $3.2 million, from $3.9 million. The decline was due to the ferrous price decline of 6% to $331 per ton compared to the third quarter of fiscal 2012.

Further, the exposure of Commercial Metals Company (NYSE:CMC) to the Chinese market is negatively affecting the revenues. Since China has a large surplus of steel, Commercial Metals Company (NYSE:CMC) exports to that country are likely to stay down. Therefore, revenues may continue to be low.