X - Nucor: Muddling Through

2023-10-17 11:42:24 ET

Summary

• Nucor is on track to earn between $16 and $20 per share this year, with shares trading range bound.
• The company has a strong position in the cyclical steel industry and has delivered on promises, certainly in recent times.
• There are concerns about lower earnings power and potential impact from M&A activity in the industry, but the overall long-term quality should prevail.

In February, I believed that Nucor ( NUE ) was doing fine in a volatile environment. This came after the company ended 2022 with a respectable, but still softer performance. With the company guiding for modest operational improvements for the start of 2023, I found comfort in this great long term capital allocator, although a willing seller on rips higher.

As it turned out, the company is on track to earn between $16 and $20 per share this year, likely towards the higher end of the range, as shares have been trading range bound. With the company delivering on promises, the valuation looks fair, yet fears about further lower earnings power here makes me cautious to increase a long term investment.

A Great Player In A Cyclical Industry

Nucor is regarded as a top-notch player in a cyclical steel industry with strong execution and a balanced capital approach driving long term outperformance in the long haul.

Nucor's shares and business peaked in 2008 around $80 per share, with the business at the time generating $25 billion in sales, accompanied by mid-double digit operating margins. Ever since, the company has been investing into the business to upgrade facilities, in what essentially was a lost decade. After all, revenues came in at $23 billion in 2019, a large decline if we factor in the cumulative impact of inflation, with operating profits of $2 billion coming in at $4 per share.

After revenues fell to the $20 billion mark in 2020, this was followed by a very strong recovery in 2021 when sales were reported at $36 billion as operating profits were reported in excess of $9 billion with diluted earnings reported at $23 per share.

The company announced a huge $3 billion deal to acquire C.H.I. Overhead Doors while 2022 turned out to be very resilient as well, with revenues reported at $41 billion and operating earnings coming in at $10 billion and change. Peak earnings of nearly $30 per share for the year came down meaningfully already in the final quarter, with earnings posted just shy of $5 per share on $8.7 billion in sales, while net debt was down to $1.7 billion.

The company guided for sequential improvements in the first quarter, as the company was on track to earn between $16 and $20 per share, making the valuation a lot more fair at levels in the $170s. This made that I found shares to be fairly valued, although willing to sell on moves higher.

What Now?

Since February, shares of Nucor have been trading range bound in a $130-$180 range, quite frankly trading around the middle of the range of $149 per share.

In April, Nucor reported earnings of $1.14 billion on $8.71 billion in sales with earnings equivalent to $4.45 per share. With earnings down meaningfully from a $7.67 per share earnings number in the same period last year, it was comforting to hear that management expected second quarter earnings to increase on a sequential basis.

As shares fell to the $130s in May, the company announced a substantial $4 billion share buyback program, as the business has sufficient financial firepower to execute on this. In July, the second quarter results showed the stabilization in the results with revenues reported at $9.52 billion as net earnings of $1.46 billion came in at $5.81 per share, all while net debt fell below the one billion mark. Buybacks make that the outstanding share base is about 5% smaller now than this time last year, and down about a fifth over the past four years.

This is despite some modest share buybacks engaged upon and the fact that over a billion in capital spending in the first half of the year more than doubled the depreciation charges in the same period of time. Third quarter earnings were seen down on a sequential basis, but it has not quantified this expected pullback. In September, Nucor guided for third quarter earnings between $4.10 and $4.20 per share, as the company is typically conservative with its intra-quarterly update.

With little activity taking place on the corporate front this year, Nucor announced the purchase of Cincinnati-based Garden Street Iron & Metals assets, to bring the total number of recycling units to 19. While no financial details have been announced, the deal involves 43 new team members to Nucor.

And Now?

With earnings power still trending at $16-$20 per share, as estimated around the start of the year, the company trades at a high single digit earnings multiple, as the business operates with a strong financial position, a very modest net debt load in fact.

That all looks pretty fair around $150 here, but there are some dark clouds on the horizon as well, as some defensive names have been warning for a slower economy here, with some peers/comparable companies having sold off quite a bit in recent times on the back of these concerns. While I have higher regards on Nucor than many peers, it is subject to the same market forces, but simply is a great executor.

Moreover, there is a wildcard and that is potential M&A in the industry. US Steel ( X ) is in play, as became apparent over the summer, with ArcelorMittal ( MT ) and Japanese Nippon Steel (NISTF) reportedly both interested in the company after Cliffs (CLF) made an offer for the business. A potential deal by any of these parties would have an impact on Nucor as well of course, but it was not ruled out in its entirety that Nucor might be an interested party as well.

With shares now trading around the $150 mark, I remain a happy holder in a modest position, but right now I see no convincing reasons to either trim or increase my position at current levels given the current circumstances.

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