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NUE AT A GLANCE

P/E ► -52.1   EV/EBITDA ► 147 VERY HIGH ROA ► -0.8% AVG ROE ► -3.2% AVG Debt to Equity ► 0.709 AVG Current Ratio ► 3.96 AVG Interest Coverage Ratio ► -1.61 AVG

 

 

 

 

 

 

Nucor is the world's 4th largest steel producer by market capitalization as of 2009. The rankings are: 1) POSCO (PKX) 2) ArcelorMittal (MT) 3) Gerdau S.A. (GGB) 4. Nucor (NUE) 5. US Steel (X). Over the last 5 years, Nucor (NUE) stock has returned 123.21%, outperforming both US Steel (X) and ArcelorMittal (MT) but underperforming POSCO (PKX) and Gerdau S.A. (GGB). ^[1]

Nucor Corp. is different because it uses scrap steel from recycled steel products instead of iron ore. As opposed to traditional large mills, Nucor runs mostly mini-mills that utilize modern steel making techniques that have given Nucor a Return on Assets (ROA) of 16.7% from 2004-2009, far exceeding the industry average of 10%. Nucor also has a very conservative financial position as of Summer 2009, with a current ratio of 5.2 as opposed to the industry average of 1.8. The company anticipates the steel industry to recover slowly, and is bracing itself by staying relatively debt free. ^[2] .

Nucor's 2nd and 3rd quarters in 2009 showed a decline in net sales of 57% relative to the same quarters in 2008. The 3rd quarter in 2009 was even worse than the second quarter, showing a 65% drop relative to the same quarter in 2008. Responding to lower demand, Nucor has seriously cut production in 2009. Plant utilization has fallen 45% on average, relative to 2008 levels. Despite losses in sales and productivity, NUCOR has consistently outperformed the Dow from 2008-2009, a sign that investors remain relatively more hopeful about steel than industrials going forward.

Due to the extreme consolidation of the steel industry, and monopolistic industry conditions, major steel producers did not cut their prices much in response to lower demand in 2009. Nucor's decline in net sales was primarily attributable to selling less steel, and not lowering prices. Major steel producers do not like cutting prices, because increasing prices back up to previous levels tends to create a demand drag during a recovery. Also, the long-term nature of big-steel contracts encourages steel companies to inhibit steel price volatility The only growth area for Nucor from 2008-2009 was in its ‘fabricated concrete reinforcing steel’ sales, which saw a 10% increase primarily driven by infrastructure spending. Overall, the company believes that steel will be subject to a long, slow recovery. ^[3]

Scrap steel prices are influenced heavily by international demand, especially by a currently flourishing China; record international demand has driven scrap steel prices to historic highs, along with overall steel prices. The steel industry has experienced unprecedented success during the past five years due to this increased demand, but also faces turbulence in the domestic economy, including trouble with the domestic automobile makers and problems in the housing construction industry, both of which are key steel customers.

Business Financials

Financial Ratios

^[4]

Nucor, while substantially less financially competitive than the industry giant Gerdau S.A. (GGB), has a strong balance sheet and admirable 5 year performance especially relative to the S&P 500 from 2004-2009.

Its Earnings Per Share (EPS) has been growing at 29.27% for the last 5 years, beating the industry average of 11.96%. This has made Nucor a more profitable investment, with a 5 year of Return on investment (ROI) of 22.2% as opposed to the industry average of 16%.

Nucor's superior steel harvesting techniques combined with its position in the United States account for many of its financial ratios. Nucor routinely has a lower Net Profit Margin than the steel industry due to higher costs associated with maintaining US operations. However, its ability to harvest scrap metal from junk allows it to position itself in places where mining steel companies would have difficulty. This accounts for its high Asset turnover ratio (TTM) of 1.7, as opposed to the steel industry's .7.

Profitable assets has allowed Nucor to expand faster than most competitors. Nucor has had a 61.73% 5 year capital expenditure growth rate, as opposed to an industry average of 43.74%. It is useful to note that both numbers are extremely high, reflecting world-wide industrialization since 2004.

Despite heavy expansion, Nucor has managed to keep its balance sheet extremely clear of debt. Its current ratio of 5.2 is 188% higher than the industry average of 1.8. A current ratio of 4 is considered extremely conservative. This reflects Nucor's view that the steel industry will be slow to recover.^[4]

Nucor's increasing conservativism can be seen its high dividend payouts. A company tends to pay more dividends when it believes it does not have good immediate growth opportunities. As Nucor has grown it has paid increasing dividends, with a dividend growth rate of 63% over the past 5 years, more than doubling the industry growth rate of 27%. ^[4]

Sales Breakdown by Segments

Nucor breaks its net sales into 4 main segments: Steel Mills, Steel Products, Raw Materials, and All Other.

^[5]]

• Steel Mills: Carbon and alloy steel in sheet, bars, structural, and plate, and Nucor's equity investment in Duferdofin-Nucor.
• Steel Products: Steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems, light gauge steel framing, steel grating and expanded metal, and wire and wire mesh.
• Raw Materials: The David J. Joseph Company, the scrap broker and processor that Nucor acquired on February 29, 2008. Nu-Iron Unlimited, a facility that produces direct reduced iron used by the steel mills and other equity investments.
• All Other: Novosteel S.A., a steel trading business.

Nucor makes the lion's share of its profits in the Steel Mills and Products Segments. Some details about the specific types of steel they produced follow:

• Steel Sheet is produced primarily for the automotive, appliance, pipe and tube, and construction industries.
• Steel Bar is produced primarily for automotive and construction industries, farm machinery, metal buildings, furniture and recreational equipment.
• Structural Steel is produced primarily for fabricators, construction companies, manufacturers and steel service centers.
• Steel Plate is produced primarily for manufacturers of heavy equipment, rail cars, ships, barges, refinery tanks, pipe and tube, pressure vessels, and construction.
• Downstream Steel Products are essentially steel that is further processed and are produced primarily for the construction and manufacturing industries.^[6]

The table below shows the net sale breakdown by product from the years 2004-2008.

^[7]

This chart displays the product sale breakdown by percentage from 2006.

^[8]

Annual and Quarterly Earnings

Q3 FY 2009 Summary

NUE announced a consolidated net loss of $29.5 million for Q3 FY 2009, an improvement of 78% from the net loss of $133.3 million the previous quarter.^[9] In Q3 FY 2009, NUE's consolidated net sales increased 26% to $3.12 billion, and increase from$2.48 billion in the second quarter. This is a 58% decrease in comparison with $7.45 billion in Q3 of FY 2008.^[9] This quarterly growth was partially driven by a 1% increase in the average sales price per ton of steel; however, it reflects a 45% drop in price from the same quarter the previous year.^[9] Also driving this growth was a 24% increase in shipments abroad from the previous quarter, but also marking a 24% from the previous year.^[9]

Year to year comparisons are explained in part by the fact that NUE purchased its inventory of high-cost pig iron prior to the economic downturn, impacting future production and sales.^[9]

Key Trends & Forces

Rising Steel Prices

Steel Futures Prices are recovering.^[10]

Steel prices peaked in Summer of 2008, before collapsing in the September 2008 recession. Steel prices are considered a leading economic indicator, because houses, cars and infrastructure needs to be built up with steel before an economic boom. Industrial companies need to purchase steel at least 3 months before an economic recovery to meet potentially explosive demand.

As of Fall 2009, 15 month steel futures trading on the London Metal Exchange show that steel orders are picking up and driving up prices, at least in the short term. An uptrend in steel prices will benefit steel producers like Nucor.

Yet, despite present optimism in contract prices, a longer-term steel price graph maintains its severe down-trend. Furthermore, 2009 demand increases are being driven by European and Asian markets which does not benefit Nucor as much due to its position in the United States.

Steel prices have fallen substantially from even 2006 levels, perhaps indicating the presence of a long-term down-trend.^[11]

Massive World Steel Over-Capacity Could Depress Steel Prices

Chinese Steel capacity increasing rapidly.^[12]

Mature markets will use less steel as technology improves (less replacements and repairs), and emerging markets will use far less steel as they become mature. Yet, steel plants will remain that can easily produce steel, causing an over-supply problem in the long-run.

Obsolescence and repair, not massive new projects, define steel demand in the industrialized world. For example, Nucor's business model would not function if American cars did not fall apart every few years, because Nucor melts down old cars and sells the steel to car companies to make new ones. If cars break down less often, Nucor pays more for scrap, and car companies make less money selling new cars and pay less for Nucor's steel. Nucor's business model will become less and less sustainable as technology advances causing cars, machinery, and infrastructure to improve in quality and break down less often.

In the meanwhile, China will eventually finish its massive industrialization project. Only India would remain as a massive potential growth market for the steel industry, but even then, China has the capacity to produce 5-8 times the amount of steel as the United States and is far geographically closer to India.

Nucor may enjoy a halo effect from global industrialization, but will simply not benefit as much as Chinese integrated steel giants. As capital goods break down less often in the industrialized world, Nucor will hurt. ^[13]

Indian Industrialization will benefit steel producers

Despite having a population on par with China's, India only produces about 1/10th of the steel. Currently producing about 55.2 million tonnes anually, India would need to produce about 300 million more tonnes annually to achieve the normal per-capita steel consumption of most industrialized countries. Despite its relatively low production, the Indian steel market has grown rapidly over the last 20 years.^[14]

In 1991, India only produced about 14 million tonnes annually. Indian Steel Minister Ram Vilas Paswan predicts that his country's steel production will grow 400% to 275 million tonnes per annum by 2012, making India the second largest steel producer behind China. ^[15]

This prediction necessarily assumes that China will continue on its same intensive industrialization through 2012. China has slowed its infrastructure projects in 2009, and it remains to be seen whether or not it will resume aggressive industrial expansion. If China does not industrialize further, it would generally be cheaper for India to import Chinese steel.^[16]

Despite somewhat poor positioning to benefit from India's industrialization, Nucor will benefit from increased steel demand because it will be able to sell some of its product to Indian markets. However, it will not benefit nearly as much as integrated Chinese steel companies unless it manages to build substantial operations in India.

Performance of Construction and Machinery

Construction and machinery dominate steel demand^[17]

The Construction and Machinery industries determine much of the world demand for steel products, especially those within China.

Environmental Concerns

The steel production industry is extremely energy intensive and is a heavy producer of greenhouse gases (GHG's). Facing increasing concern about global warming and simultaneous rising demands for energy worldwide, there has been significant legislation that now affects the steel industry.

The House or Representatives passed a bill to curb U.S. greenhouse-gas emissions on June 26, 2009. This bill, called Cap and Trade, will hurt integrated steel mills at U.S. Steel, ArcellorMittal, and OAO Severstal the most because they kick out the most carbon dioxide. Nucor and the Commercial Metals Company primarily re-melt scrap, which emits about 2/3 less carbon than competitors. Even though Nucor might gain competitve advantage relative to other domestic steel companies, the net effect of the Cap and Trade Bill will hurt all domestic steel players because it will incentivize production in countries without emissions caps like Brazil.^[18]

Cyclical Nature of the Steel industry

The steel industry is traditionally very cyclical in nature and its success is closely tied to other domestic industries such as the U.S. Auto Industry and the Construction Industry. Considering the recent trouble in the domestic auto market and the current subprime lending crisis, the steel industry may be affected very negatively.

Market Share

Competition

Nucor distinguishes itself from the rest of the steel industry with its use of scrap steel, a fact that makes Nucor the largest recycler in the nation.^[26] Furthermore, the company uses modern steel making techniques allowing Nucor to employ fewer workers. The workers that Nucor does employ are all independent of unions; these workers have a vested interested in the productivity of the company because a significant portion of their compensation is based on their own productivity.^[27] In addition, Nucor has recently focused heavily on acquisitions to increase production capacity and to make the company more competitive in the global market.^[28]

Source: 2006 Company Reports

References

1. ↑ Finance Data
2. ↑ Competitiveness
3. ↑ 10q, Aug 11, 2009
4. ↑ ^{4.0 4.1 4.2} Competitiveness
5. ↑ Nucor 2007-2009 Annual and Quarterly SEC Filings
6. ↑ Nucor 2006 Annual Report pg 11-12
7. ↑ Nucor 2008 Annual Report, page 86
8. ↑ Nucor 2006 Annual Report pg 21
9. ↑ ^{9.0 9.1 9.2 9.3 9.4} Nucor Reports Results for Third Quarter and First Nine Months of 2009
10. ↑ Steel Futures
11. ↑ Steel Market Trends, OECD Report
12. ↑ Steel Market Trends, OECD Report
13. ↑ Steel Market Trends, OECD Report
14. ↑ Steel Market Trends, OECD Report
15. ↑ Standard, New Delhi
16. ↑ Steel Market Trends, OECD Report
17. ↑ Steel Market Trends, OECD Report
18. ↑ of Reps Passes Cap and Trade
19. ↑ Steel on the Net - World Steel Review, August 2009
20. ↑ X, Q2 2009, 10-Q, Item 4, Page 58
21. ↑ NUE, Q2 2009, 10-Q, Item 2, Page 19
22. ↑ SCHN, Q3 2009, 10-Q, Item 2, Page 30
23. ↑ AKS, Q2 2009, Quarterly Earnings Release
24. ↑ AKS, Q2 2009, 10-Q, Item 2, Page 27
25. ↑ CMC, Q2 2009, 10-Q, Item 2, Page 25
26. ↑ Nucor 2006 10k pg 1
27. ↑ Nucor 2006 Annual Report pg 13
28. ↑ Nucor 2006 10k pg 3