Steelmaker Nucor (NYSE:NUE) is one of the best investments that investors could make in the steel industry. Nucor was able to maintain its profitability in a sluggish steel market, and now, it looks like its fortunes are gradually picking up. Moreover, with Nucor shares seeing some weakness this year, this could be an ideal time to initiate a position in the company.
Nucor has been performing well despite a challenging market and several plant downtimes. Even after such headwinds, Nucor's revenue in the last-reported fourth quarter rose 10% to $4.89 billion. In addition, net income also increased to $170.5 million from $136.9 million in the year ago period. So, right off the bat, it seems that Nucor's cost-cutting strategies and operational efficiencies are delivering results. Going forward, there are a slew of factors that should propel Nucor's growth, making it a good long-term buy.
Catalysts to watch
Nucor has benefited from the revival of the auto industry in the U.S. In 2013, car sales in the U.S. rose to 15.6 million units, up 7.6% from the preceding year. For 2014, it is projected that the auto industry will continue performing well with sales of 16 million units. The sustained performance of the auto industry will lead to increased demand for steel this year as well and help Nucor's top and bottom line performance.
To keep its growth trajectory intact, Nucor is looking to make its operations more profitable. For instance, it opened a facility in Louisiana to produce direct reduced iron, or DRI, in addition to the existing facility at Trinidad. Interestingly, its Louisiana plant has outperformed the facility at Trinidad with better DRI quality.
This facility at Louisiana will help Nucor procure low-cost, long-term natural gas supply, which will act as a game changer for Nucor's cost structure. It will also improve its operating flexibility with a shorter supply chain for high quality iron users. Due to this flexibility, Nucor can make the best possible capital allocation depending on the prevailing natural gas price.
Relief from imports
Nucor's prospects should also improve as the government imposes sanctions on imports. Capacity utilization has remained low in the U.S. but even then, foreign steel makers have been dumping their steel products in the market due to depressed pricing in their home markets. Heavy imports damaged pricing trends in the steel industry in the U.S. on the back of hot-rolled sheet steel imports from China, India, Indonesia, Taiwan, Thailand and Ukraine.
However, the International Trade Commission rolled out a 5-year sunset review to keep in place existing anti-dumping and countervailing duty orders after determining that imports have hurt U.S. steel makers. So this is another reason why investors can expect Nucor to sustain its solid performance this year.
Capacity expansion to improve efficiency
Capacity expansion is also a key part of Nucor's strategy. The company is expanding at Berkeley by investing $100 million for the enhancement of its caster and hot mill. This will enable Nucor to launch new products, which include 72-inch wide hot-rolled pickle and oil, 72-inch wide cold-rolled and gauges that are as thin as 0.042 inches. This development will help Nucor improve its product mix, enabling it to move up the value chain in agricultural, automotive, heavy equipment, machinery and pipe and tube applications.
Moreover, Nucor has achieved significant progress in the implementation its strategy to increase participation in higher margin special bar quality (SBQ) products. Expansion in this line will help Nucor record better productivity in energy, heavy equipments, and various other markets. Moreover, Nucor has also upgraded its Nebraska mill, which will further enable it to expand its SBQ market.
Nucor Tennessee has also installed a new quality assurance line, which will allow it to provide engineered bars for various applications. Nucor's Hertford facility is also performing well due to investments in the heat treatment facility, vacuum tank degasser, and a normalizing line. So far, these investments have paid off, with Nucor reporting record heat treat shipments in the fourth quarter from Hertford.
It also expects the Nucor-Yamato structural mill to start production in mid-2014. This $115 million investment will expand Nucor's sheet piling capabilities, increasing the single sheet piling width by 22% and also provide a lighter, stronger product, resulting in lowered costs.
Valuation and projections
Nucor's trailing P/E is pretty high at 34, but its forward P/E does look impressive at 13.45 and signifies earnings growth. Being the largest manufacturer of steel in the U.S. by volume, there are some strong reasons why investors should consider paying a premium for the stock. First, the company is profitable so far and is looking to get better through various moves. Next, analysts are quite hopeful about the company's prospects going forward.
It is projected that Nucor's earnings will increase at a CAGR of 31.65% over the next five years, significantly outperforming the industry's growth rate of 8%. Finally, Nucor also pays a healthy dividend, yielding 2.90%.
Hence, Nucor looks very well-positioned for the long run and its fundamentals are also impressive. Thus, investors should consider capitalizing on the stock's meek performance so far this year by adding to their long positions.