2024-01-15 07:36:08 ET
Summary
- Nucor Corporation is a leading steel producer in the US, well-positioned to benefit from infrastructure renewal and green energy implementation.
- Despite a decline in earnings in the third quarter of 2023, Nucor has strong margins and returns compared to its competitors.
- Nucor has a strong balance sheet, with high credit ratings, $6.62 billion long-term debt, $6.83 billion total debt, and $5.8 billion cash.
- NUE falls in the lower percentiles in both categories measured by EV/Sales and EV/EBITDA. With 1.2 EV/Sales and 5.3 EV/EBITDA NUE, it is a buy.
Introduction
Nucor Corporation ( NUE ) is one of the most important companies in the US. It operates in the boring and underestimated steel industry. The US plans to renew its infrastructure needs with an exuberant quantity of various commodities. Steel comes to mind first when we talk about infrastructure. NUE is one of North America's largest steel producers globally and the leading recycler.
The company leads its regional competitors, Cleveland-Cliffs ( CLF ), United States Steel ( X ), and Steel Dynamics ( STLD ). NUE has superior margins and returns, pays dividends with a higher yield, and repurchases its shares. Although those perks come at a price, NUE trades at higher EV/Sales and Price/Tangible Book.
Koyfin
Looking at the performance chart, NUE still has to catch up with X. My verdict is a buy rating.
NUE overview
NUE is the largest recycler in the US. Its steel production comes from nearly 80% recycled content, though some products contain 100% recycled materials. The map below from the last company presentation shows NUE operations.
NUE presentation
The company has 70 facilities in the US dedicated to scrap recycling, two facilities for Direct reduced iron ((DRI)), and five industrial gas plants. NIE consumes 25-30 Mt of scrap per year as feedstock for steel production. 50% comes from obsolete scrap, 10-15% from DRI, and approximately 20% from prime scrap.
NUE presentation
The prime scrap has a high ferrous content. It is an exhaust material after industrial processes, such as grinding, cutting, trimming, etc. Obsolete scrap has lower ferrous content. It comes from demolition scrap and post-consumer products. Obsolete scrap supply is ample and readily available. DRI is the third pillar in the NUE supply chain. The company owns a DRI processing plant in Louisiana, with an annual capacity of 4 million tons.
NUE revenue originates 100% from the US, unlike X and CLF. X exports 21% of its production to Europe, while CLF exports 9% to Canada and other countries. NUE is well positioned to benefit from the ongoing infrastructure renewal, green energy implementation, and semiconductors. The chart below shows the company's strategy to exploit those significant trends.
NUE presentation
The steel demand game is in its early innings. Simply put, there is a lot of upside potential to catch up. I assume the global geopolitical turbulence will speed up those processes and, in general, will benefit US heavy industry. In 2022, the US imported 13% of its steel from Japan and South Korea. Given the precarious state of the global supply chains, it’s time for the US administration to focus on local steel producers.
3Q23 results
NUE reported net earnings of $1.14 billion, or $4.57 per share 3Q23 . For reference, in 2Q23, the company realized net earnings of $1.46 billion, or $5.8/share, and $1.69 billion, or $6.50 per diluted share, for 3Q22. Earnings fell across all company divisions YoY and QoQ.
NUE 3Q23 filling
Net sales for 3Q23 decreased 16% YoY. Average sales price per ton decreased 14% YoY to $1,406 in 3Q23. Total tons shipped to outside customers in the 3Q23 were approximately 6,240,000 tons, a 3% decline compared to 3Q22.
NUE revenue comes from 57% steel mills, 36 steel production, and 5% raw materials. The steel mills segment experienced a 37% decline in pretax earnings to $883 million in 3Q23. The revenue dropped by 15% YoY. The steel mills segment had lower profits due to declining sales and lower realized prices. Rebar fabrication operations, which substantially increased profitability in 3Q23, partially compensated for the declining profits of most of the businesses in the steel products segment.
NUE announced its projected figures for 4Q23: diluted share profits for the fourth quarter to be between $2.75 and $2.85, significantly lower than 3Q23 ($4.57 per diluted share) and 4Q22 ( $4.89 per diluted share).
The lower realized prices and production volumes will adversely affect earnings in 4Q23 from the steel mill and steel production segments. Due to lower raw material prices and scheduled downtime at DRI facilities, revenues for the raw materials segment are anticipated to decline in the fourth quarter of 2023 relative to the third quarter of 2023.
Despite the disappointing last quarter and 4Q projections, NUE commands the best margins and returns compared to X and CLF.
Koyfin
The rising iron price (+11.48% LTM) and declining steel prices (-6.49% LTM) squeezed all steel producers' margins. Over the last ten years, NUE maintained strong margins even at the bottom of steel prices in 2015-2016, when the price fell below $2000/ton. Since 2017, the price has been above $3500/ton, boosting steel producers' profits.
I assume the supply chain disruption caused by the Red Sea crisis and the Panama Canal drought will impact steel prices, too. Probably in 2Q24, the steel price will reach $4500/ton. Simply put, NUE's profitability will improve significantly.
NUE balance sheet
NUE holds the highest credit ratings of any steel producer in North America: an A- long-term rating from S&P, an A- rating from Fitch Ratings, and a Baa1 long-term rating from Moody's. The company has $6.62 billion long-term debt, $6.83 billion total debt, and $5.8 billion cash. The company’s net interest expenses ($27 million) are mere statistical errors given its cash position, operating cash flow ($8.1 million), and operating earnings ($6.7 billion).
NUE presentation
NUE has $6.73 billion ($4.94 billion as of December 31, 2022) in total cash and cash equivalents, short-term investments, and restricted cash and cash equivalents. In 3Q26, NUE has a maturing $1.75 billion revolving credit facility (RCF). There is only one financial covenant in the RCF: a 60% maximum on the financed debt to total capital ratio. In 3Q23, the funded debt to total capital ratio was 23.7%, satisfying the RCF covenant.
Compared to its major US competitors, NUE has a superior balance sheet.
Koyfin
It has 31% debt to equity, 0.9 Total debt to EBITDA, and 33 EBITDA/Interest expenses. X and CLF have healthy balance sheets, too. The point of the juxtaposition is to estimate who is the best among the best.
Dividends and valuation
Nucor offers the most value for its shareholders, with 1.29% dividend yields and 4.39% buyback yield. The dividends are more secure considering NUE's low payout ratio and high FCF per share.
Koyfin
NUE trades above or close to its five-year average figures (0.99 EV/Sales, 5.9 EV/EBITDA, 1.91 P/TBV).
Koyfin
Even at 1.2 EV/Sales, the company offers much value for its price. Now let’s look at the big picture, NUE valuations vs. US/Canada materials and the US/Canada broad market.
Koyfin
NUE falls in the lower percentiles in both categories measured by EV/Sales and EV/EBITDA. Inline the strong FCF figures in 3Q23 NUE trade at the bottom percentiles based on Price/FCF.
I am not expecting the NUE price to decline significantly unless we do not get unexpected events such as global war or pandemic. However, apocalyptic predictions are not my favorite. Too often, their authors sell fear to enhance their popularity, and too rarely, they carry value for us. At the present price, NUE is a buy.
Price action
NUE price action is on the verge of a breakout above long-term resistance at the $170 price level.
Trading View
A confirmed breakout will provide a good entry point with an excellent risk reward. SQN indicator is in a bull volatile regime (blue). Usually, the markets reverse in a volatile regime. However, considering SQN in isolation is not enough to conclude that the market will shift its direction. Determining how long the price has been in a volatile regime and how extended the price action is crucial. The price is close to the 20-month moving average (MMA). In my opinion, the present technical setup is excellent for initial positioning. A confirmed breakout will allow adding more risk to the NUE position.
Final thoughts
NUE is exposed heavily to the US economy. A severe recession will squeeze the steel demand, adversely impacting the industry. For now, I do not see signs of a hard landing. It is worth mentioning the rising geopolitical risk will boost defense pending further. Steel is a primary ingredient in the defense industry.
NUE`s success depends on US infrastructure renewal, green energy transition, and reshoring trends. They require exuberant quantities of steel. NUE might benefit significantly from those trends. The company is the largest scrap producer in the US and falls in the top twenty global steel producers.
NUE is financially sound, with $5.8 billion cash and $6.83 billion total debt. The company returns shareholders' value via buybacks and dividends. Compared to its US peers, NUE pays dividends with high yields. Last quarter was disappointing, with declining revenues and earnings—one positive FCF per share growth. Compared to X and CLF, NUE scores better margins and returns. With a long-term tailwind for steel demand and catalysts as supply chain disruptions, I expect steel prices to soar. NUE will reap significant profits in such a scenario. NUE falls in the lower percentiles in both categories measured by EV/Sales and EV/EBITDA. With 1.2 EV/Sales and 5.3 EV/EBITDA NUE, it is a buy.
For further details see:
Nucor: Bet On Growing Steel Demand In The U.S.