- Nucor is investing in its production facilities to tap the growing demand for steel.
- Nucor's Louisiana DRI facility will allow the company to lower its cost structure and bolster its raw material production.
- Positive end-market activity indicates that Nucor has strong prospects.
- Nucor's bottom-line growth projection is quite impressive, and the stock is cheaply valued on a forward P/E basis.
Demand for steel is improving. According to the World Steel Association, "global apparent steel demand" is expected to increase 3.3% this year to 1.523 billion tons. This improvement is being driven by better economic growth in the developed markets. As such, it is not surprising that Nucor (NYSE:NUE), one of the most well-known steel producers in the U.S., has been reporting solid growth in its financials.
When Nucor reported its second-quarter results, its revenue increased an impressive 13% year over year to $5.29 billion, better than the $5.21 billion consensus estimate. In addition, Nucor's consolidated second-quarter net earnings of $147 million, or $0.46 per share, were above the expectation of $0.35 to $0.40 per share. In fact, this was a marked improvement over net earnings of $85.1 million, or $0.27 per share, in the year-ago quarter.
The company benefited due better selling price of steel, along with an improve in shipments. Looking ahead, Nucor expects the momentum to continue, as it called for an even better earnings performance in the third quarter.
Investments will drive growth
Nucor is benefiting from the strategic investments that it made when the steel industry was in a soup. The company had focused on improving its cost structure, and positioned its product portfolio to offer higher value-added margin offerings. These strategic investments have now started reaping benefits, and should help Nucor amplify its performance as the steel market improves and non-residential construction activity picks up.
As an example of its moves, it has invested $115 million to develop its production capabilities for sheet piling at the Nucor-Yamato structural mill. This project was completed during the previous quarter, and the new products out of the mill are currently under trial. Nucor expects primary production to begin in the fourth quarter.
According to Nucor, the new piling sections will boost single sheet widths by 22%. This will result in a lighter, stronger piling, capturing a larger area at a lower installed cost. The company believes that this investment will bolster its position in the piling business.
The Louisiana DRI facility improves Nucor's position
The successful setup of the Louisiana DRI plant is an important cog in the wheel for implementing Nucor's raw materials strategy going forward. Nucor's inflating DRI capacity, along with its natural gas investments, will improve the company's standing in higher value-added sheet and plate in the SBQ markets. In fact, Louisiana is exhibiting superlative quality standards according to Nucor, with metallization rates above 96% and carbon content greater than 4%.
Now, Louisiana's output is already being consumed by Nucor's flat rolls and SBQ steel mills. The company believes that this raw material strategy will improve its cost structure in the long run, apart from offering superior iron quality to compete in the market. In addition, the Louisiana DRI facility also lessens the operating costs of its mills due to a reduction in consumables and energy usage, while also delivering improved productivity.
Moreover, Nucor's raw material strategy will allow it to improve the mix of its iron units on the basis of variations and the pricing of those raw materials in the market. In addition, Nucor will enjoy higher commercial flexibility to work with its contract customers.
Positive end-market activity
Hence, armed with a strong raw material strategy, it is not surprising to see that Nucor is witnessing strong demand and increasing its presence in the existing markets. For example, the company's Bar Mill group has successfully penetrated the rod and SBQ markets during the first half of 2014. The company has increased production at the new rod mill in South Carolina. Now, Nucor is getting positive customer feedback with the expanding product range, which includes high carbon and wire rod that are in solid demand.
The company has also built a diversified base of users. As reported by Bloomberg:
Nucor melts scrap steel in electric furnaces to produce metal that's sold to customers including appliance manufacturer Whirlpool Corp. and Bluelinx Holdings Inc., a distributor of building products. The company also sells steel used in cars, trucks and construction equipment.
Now, all these end markets mentioned above are expected to improve. For example, automotive growth is on a roll this year, increasing 9% in the month of July. For the full year, auto sales are expected to hit 16.7 million units, up from 15.8 million in the year-ago period. As such, Nucor's prospects should continue improving going forward, and since the company has an attractive valuation, it could prove to be a good investment.
Nucor has a trailing P/E of 31.03, while its forward P/E is just 15.23. This means that the company's bottom line is expected to improve going forward. The PEG ratio of 0.74, below 1, is also impressive and suggests undervaluation. Its current ratio of 3.22 signifies a strong liquidity position.
Nucor's impressive long-term growth prospects are indicated by its estimated earnings CAGR of 32.30% for the next five years, much above the industry's average of 4.25%. Finally, Nucor also carries a strong dividend yield of 2.90%, and this is another reason why investors should consider the stock for their portfolio.