The steel sector has been one of the best performers in so far in 2012. The sector ETF, Market Vectors Steel ETF (SLX) is up over 21% so far in 2012 (see chart):
It is often said that a "rising tide lifts all boats"; this has certainly been true for the steel sector this year. Shares of all the major steel producers have rallied in 2012.
Steel Producers Performance Year-to-Date
- U.S. Steel (X) +20.42%
- Nucor (NUE) +14.05%
- Arcelor Mittal (MT) + 17.87%
- AK Steel (AKS) + 8.10%
- Reliance Steel (RS) +12.49%
- Steel Dynamics (STLD) +24.03%
This rally presents investors with an opportunity to move out of the lesser-quality steel stocks and into the higher-quality ones. Specifically, investors should swap out of X and into NUE.
U.S. Steel Loses Money
X recently reported a Q4 loss of $226 million or $1.57 per share. Excluding one time chargers X reported a loss of $164 million or $1.14 per share. These numbers were better than the same quarter in 2010, but that is largely because Q4 2010 was very bad. X reported a loss of $249 million or $1.74 a share in Q4 2010. For the full year 2011, X reported a loss of $68 million or $0.47 per share. This compares to a loss of $482 million or $3.36 per share in 2010. X is making progress, but the company is still losing money. One negative is that Q4 was the worst quarter of the year for X, this means that loses are likely to continue for some time.
Nucor Makes Money
NUE reported Q4 earnings of $137 million or $0.43 per share. For the full year 2011, NUE reported earnings of $774 million or $2.45 per share. The strong profits in 2011 are a testament to the strength of NUE and its superior management.
X has net debt of $3.82 billion and equity of $4.6 billion. NUE has net debt of $1.72 billion and equity of $14.3 billion. This means that NUE has a much lower debt/equity ratio than X. The debt load for X is even more worrisome because the company is currently losing money.
NUE pays a health dividend of 3.24%. This compares to just 0.63% for X. If X continues to lose money, it will likely be forced to cut the dividend. NUE only pays out 59% of earnings for the dividend, so even if business does not improve NUE will still be in good shape to pay the dividend.
Investors should use the rally in steel stocks to sell X and move into NUE. NUE continues to prove that it is the best operator and X continues to prove that it is a poor operator. Buying NUE instead of X gives investors a better company at a better price.