By Matt Doiron
Nucor (NUE) is down 44% in the last five years, though that's actually not that bad for a steel company: U.S. Steel (X) has fallen more than 80% over the same period, and Steel Dynamics (STLD) had underperformed Nucor as well. Still, Nucor - along with the rest of the industry - continues to struggle. The company recently reported its results for the first quarter of 2013, with a 10% decline in revenue contributing to a 42% fall in earnings. Cash flow from operations came in well below Nucor's capital investments; while the business was left with a substantial cash balance, the quarter was certainly a quite negative development.
The market, however, is pricing in expectations that Nucor will recover. In fact, the stock trades at a little over 30 times its trailing earnings, which seems quite aggressive to us. Wall Street analysts are also bullish, interestingly, with their forecasts for 2014 calling for earnings per share of $3.80. That figure implies a forward P/E of 11. Hitting that target would make the stock interesting in value terms, but we wouldn't want to depend on the sell-side being correct.
Nucor had to cut its quarterly dividend payments in fall 2008, and has not increased them by much since that time; however, given the correction in its stock price as well, the dividend yield is currently 3.5%. Of course, as a steel company Nucor depends on macro demand and so the beta of 1.3 puts it out of consideration for more defensive investors, but those looking only for income might find such a high yield appealing (though of course the dividend could be cut if cash flow problems persist).
We track quarterly 13F filings from hedge funds and other notable investors as part of our work investing strategies; we have found, for example, that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year. Our database of filings can also be used to find individual managers who liked Nucor as of the beginning of this year. Adage Capital Management, which is managed by Phil Gross and Robert Atchinson, cut their stake by 35% to about 550,000 shares (find Adage's favorite stocks). Billionaire Glenn Dubin's Highbridge Capital Management reported a position of about 510,000 shares (see Dubin's stock picks).
U.S. Steel's losses in the fourth quarter of 2012 were smaller than expected, but the company is still struggling with profitability and 26% of the float is held short. Analysts are even more optimistic here than at Nucor, judging by the forward earnings multiple of only 8, but we still think it's best to avoid the stock. At Steel Dynamics, net income actually ticked up last quarter compared to the first quarter of 2012, but with revenue down by 9% we aren't sure the business is truly in a better position than Nucor, at least in a sustainable fashion. There is a discount in terms of trailing earnings compared with that company, however, and it might be a better prospect for investors who are bullish on steel generally.
We can also compare Nucor with AK Steel (AKS) and to ArcelorMittal (MT). AK Steel is down 60% in the last year alone, and yet is still a very popular short target despite its small market cap. The company is unprofitable as well, and we don't think that it is a good buy. ArcelorMittal is valued at $19 billion, which comes out to 9 times forward estimates. That is even with some of these peers, though like them ArcelorMittal has been seeing declining sales despite being dependent on improved financials. We would note that the company recently cut its dividend.
The steel industry doesn't feature any particularly attractive companies at this time, although income investors might consider Nucor purely as a dividend stock (though other basic materials or industrial companies could be better fits for an income portfolio). As we've mentioned, Steel Dynamics looks to be a bit closer to value territory and so anyone believing in a general industry recovery might start by looking there to see if its recent rise in net income is real and sustainable.