Nucor Corporation (NYSE:NUE)’s Q4 2012 earnings were within the guidance range due to operating profits that beat expectations. Nucor remains optimistic as it has a diversified client base, which makes it not highly dependent on the conditions prevalent in any particular geography. Its strongest end market is the manufactured goods, including automotive, energy and heavy equipment.
The company’s Q1 2013 earnings expectations, however, are below the Q4 level due to lower level of operating performance. This article analyzes the pros and cons of Nucor’s operating activities from an investor’s point of view.
Nucor Corporation (NYSE:NUE), headquartered in Charlotte, manufactures steel and steel products. Nucor also produces direct reduced iron to use in the company’s steel mills. Nucor is the largest U.S. steel producer by market cap. It is also the largest North American recycler. Nucor has three main reporting segments: Steel Mills, Steel Products and Raw Materials.
Investing in Nucor: The Pros
Strong Cash Flow: Overall market conditions remained extremely challenging in 2012. However, difficult steel markets highlight the value and strength of Nucor’s business model. The best evidence is provided by Nucor’s ability to generate strong cash flow through cyclical downturns. 2012 cash provided by operating activities increased to $1.2 billion from 2011’s operating cash flow of $1 billion.
Outplaying Cyclical Downturn: During the cyclical downturn from 2009 through 2012, average annual cash generated from operations is more than double the amount generated during the last downturn from 2001 through 2003. Nucor’s growth strategy’s objective is higher highs and higher lows in the returns achieved through successive business cycles, according to Nucor management.
Robust Balance Sheet: The balance sheet strength remains another important attribute of Nucor’s business model. Taking advantage of the company’s healthy cash flow and liquidity position, Nucor management retired $650 million in maturing long-term debt in the fourth quarter of 2012. Nucor’s total debt-to-capital ratio is now 31.7%. That is down 4 percentage points from year end 2011.
Investing in Nucor Corporation (NYSE:NUE): The Cons
Commercial Construction Challenges: Nucor is still facing challenges in the commercial construction market, which along with a weakening SBQ (Special Bar Quality) steel market remains a headwind. Residential construction market is showing signs of improvement but Nucor’s exposure is in the commercial construction market, which is expected to improve slowly in the coming years.
Growing Imports: Imports of steel making products into the U.S. have increased considerably in recent years. If the next few years also see a significant increase in imports of steel making products, demand for domestic steel producers’ products will go down and their earnings will be negatively impacted.
Volatile Scrap Costs: Nucor’s steel making process depends heavily on scrap. Volatile scrap prices, especially when Nucor Corporation (NYSE:NUE) is not able to pass those costs onto customers, could dent earnings.
Steel Industry Outlook
As the major stakeholder (about 60%) of the metals market, the steel industry was severely bruised by the global economic downturn. Recovery, however, has been swift and forceful. According to the World Steel Association, world crude steel production reached a record level of 1,527 million tons (Mt) in 2011, outperforming the 2010 record of 1,414 Mt, a 6.8% jump. World crude steel production was 1,548 Mt in 2012, outperforming the 2011 level by 1.2%. This trend has largely remained in place in 2013, though the emerging growth worries will likely force some producers to take production off-line.
The automotive and construction markets have historically been the largest consumers of steel. The automotive sector has shown significant promise. In February 2012, total motor vehicle sales reached their highest level since February 2008 at 15.1 million SAAR (Seasonally Adjusted Annual Rate). For the first five months of 2012, sales have averaged 14.4 million SAAR. Many auto manufacturers made their best Memorial Day sales in over five years. 2013 SAAR is expected to be 15.5 to 16 million units, a significant increase from its 2012 average level of 14.5 million units.
Nucor Well Positioned Against Peers
Given the weak economic scenario in Europe, ArcelorMittal (ADR) (NYSE:MT), the world’s largest steelmaker in terms of volume, announced its plans in January 2013 to permanently close its plant in Liege, Belgium, owing to the slack demand. These plans, however, faced protests from the country’s leaders. In response, ArcelorMittal (ADR) (NYSE:MT) has agreed to stall its restructuring programs through June until the European Union Commission publishes its plan to revive Europe’s steel industry.
ArcelorMittal (ADR) (NYSE:MT) is recognized for having developed a sustainable business, as well as having invested in Europe, creating proper conditions for global investors in Europe. Proving to be continuously succeeding, the company’s capital expenditure in 2013 is expected to be approximately $3.5 billion and steel shipments are expected to increase by approximately 2% to 3% as compared to the previous year. The Board of Directors proposed a 20 cent dividend per share, payable in July.
United States Steel Corporation (NYSE:X) is one of the largest steel producers in the world. The company has two main product lines, which include flat-rolled products and tubular products. In addition to the steelmaking assets, the company has iron ore and coke production facilities, rail and barge transportation operations, real estate and engineering and consulting services.
Although United States Steel Corporation (NYSE:X) is benefiting from a strong domestic demand from the auto sector, the company’s high margin tubular segment remains challenged and will more than offset any benefit from a recovery in steel demand during 2013.
In January, United States Steel Corporation (NYSE:X) reported solid Q4 2012 results, its third consecutive quarter with all its segments having positive operating results despite uncertainty in the global economy. For the current fiscal year the company expects a slight improvement in its European operation. The flat-rolled segment is expected to be near breakeven. Five cents per share dividend on common stock is payable on March 8.
The Bottom Line
Despite operating at only 70% of its capacity, Nucor Corporation (NYSE:NUE) is delivering consistent results. I expect Nucor’s strategy to move up in the value chain for a majority of its products should result in better margins in 2013. Due to its strong balance sheet and a track record of cash discipline, I feel Nucor, especially in comparison to its peers, is in a strong position and has value for long-term investors. Moreover, the stock also yields value for dividend seeking investors with a 3% dividend yield.
The article Why Nucor Is A Strong Value Play originally appeared on Fool.com and is written by Anindya Batabyal.
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