Nucor May Climb Close To 30%, Dwarfing Mosaic And Weyerhaueser

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Includes: MOS, NUE, WY
by: Takeover Analyst

I take a closer look at three basic materials firms operating in the iron & steel, chemicals, and timber industries. Of the three firms, Nucor (NYSE:NUE) is the most preferred on the Street, given its positive secular trends and ROE expansion. Based on my review of the fundamentals and multiples analysis, I similarly find the strongest upside for Nucor. All the ratings have been sourced from T1 Banker.

Nucor

Nucor is rated around a "buy" and trades at a respective 17.9x and 10.8x past and forward earnings, with a dividend yield of 3.3%.

Consensus estimates for Nucor's EPS forecast that it will grow by 32.6% to $3.17 in 2012, and then by 28.1% and 14.5% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $4.02, the rough intrinsic value of the stock is $56.28, implying 28.2% upside.

I find the bar for Nucor has been set overly low due to near-term uncertainty. However, if greater spending at the Louisiana DRI project and expansion in Tennessee, South Carolina, and Nebraska are any indication, management is confident about the fundamentals. S&P's expects spending to rise by only 1.7% in 2012, but emerging market demand may indicate a more optimistic growth story.

Mosaic

Mosaic (NYSE:MOS) is rated around a "hold" and trades at a respective 10.6x and 10.8x past and forward earnings, with a dividend yield of 0.4%.

Consensus estimates for Mosaic's EPS forecast that it will grow by 9.3% to $4.82 in 2012, and then by 6.4% and 13.1% in the following two years. The firm made notable progress in the recent quarter, with solid international demand. Management further repurchased $1.2B worth of shares from Cargill. The drawn out South Fort Meade case has exacerbated investor fatigue and raises concerns about execution going forward.

Weyerhaueser

Weyerhaueser (NYSE:WY) is rated around a "hold" and trades at a respective 35x and 28.3x past and forward earnings, with a dividend yield of 2.9%.

Consensus estimates for Weyerhaueser's EPS forecast that it will grow by 24.2% to $0.41 in 2012, and then by 78% and 60.3% in the following two years. Assuming a multiple of 31x and a conservative 2013 EPS of $0.69, the rough intrinsic value of the stock is $21.39, implying 3.6% upside.

The firm is attractive in view of its solid balance sheet and focus on innovation. Management is further committed to returning free cash flow to shareholders through an aggressive capital allocation policy. On the other hand, the outlook for raw material and FX volatility is hindering value creation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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