18% Upside on This Steel Stock: Nucor Corporation (NUE)

Nucor Corporation (NYSE: NUE) is the largest steel producer in the U.S. It is also the largest recycler of any material in the North American region, recycling half a ton every second. Nucor’s annual steelmaking capacity stands at around 25 million tons.

Nucor Corporation (NYSE: NUE)’s Earnings

Recently, Nucor released its earnings for the fourth quarter 2012. The company reported earnings per share of $0.43, beating the guidance range that was $0.25 to $0.30. In 2012, the cash flows from operations increased to $1.2 billion from $1 billion in 2011. As the company had a lot of cash in its system, it retired $650 million of long term debt in the latest quarter. As a result, Nucor’s total debt to capital ratio now stands at 31.7%. The capital spending in 2012 totaled $948 million, a large amount of which was invested in the growth projects. Moreover, $675 million was spent during the acquisition of Skyline Steel.

Cash, short-term investments, and restricted cash were $1.4 billion. Further, the company had no commercial paper outstanding till its fourth quarter. On January 16, Standard & Poors published a report entitled “U.S. Metals and Mining Companies, Strongest to Weakest” where Nucor stood number 1 for credit rating and outlook among 67 companies.

The company’s Arkansas steel mill started twin tank vacuum degasser in the latest quarter. Vacuum degasser removes hydrogen, nitrogen, and carbon from molten steel. This results in better electrical efficiency, more formability, and lesser susceptibility to cracking. The degasser is all set to expand the company’s value added products to several markets in the future.

Imports continued to present a serious challenge to the U.S. steel industry. According to U.S. Census Bureau data for December, full year imports stood at 26.7 million tons, depicting a 17% increase from 2011 and a 38% increase from 2010. Having said this, the U.S. steel industry increased its production capacity by only 10% during these two years. In short, these imports are still significantly hampering the local steel industry.

Valuation

Currently, Nucor is trading at a forward P/E (1yr) of 11.89x, has a PEG of 2.30 and has a mean recommendation of 2.30 on the sell side. Using steel industry’s average forward P/E of 10.4x, we can value Nucor. However, as it is the market leader in the U.S. steel industry and is expected to remain there for some time, I would value Nucor by applying a premium of 5%.

According to high earnings estimates, Nucor should be trading around $55.15 that shows it’s undervalued by almost 18%. In short, it’s still one of the best buys in the steel industry.

Steel industry

In case of Steel Dynamics, Inc. (NASDAQ: STLD), the scenario is somewhat different. With a forward P/E of 9.19x, it is relatively cheaper than the U.S. Steel. It is yielding a healthy dividend of 2.60% that is far greater than that of U.S. Steel. In contrast to U.S. Steel’s low growth, it has a strong growth rate of 17.43%. Plus, a mean recommendation of 2.5 on the sell side testifies the fact that it is a far better buy than U.S. Steel. Moreover, a PEGY of 0.78 depicts that it is an undervalued stock and has a significant upside potential. The bottom line is that I recommend buying Steel Dynamics at this stage.