Nucor Coporation: Little Reason For Optimism

Nucor (NUE) shook up the steel sector Wednesday, guiding earnings to $1.10 - $1.15 for the third quarter. This compares to $1.14 in Q2 and record earnings of $1.70 in the same quarter last year. In the press release, the company cited continuing softness in sheet metal markets and increasing costs of raw-materials. The company also noted that the softness was largely due to a lack of demand in the automotive industry and residential construction. With housing, not only are the structures not being built, but consumers are subsequently not buying washers and dryers, ovens, refrigerators, and other appliances that typically have a high steel content.

Another headwind the company mentioned is that imports from China have been stubbornly high for the first 7 months of the year, and although they have backed off a bit in August, it is still a concern. Strong import numbers from China (or anywhere else) add pressure to steel prices hurting domestic producers who have more competition. As mentioned in my previous Nucor article, this is the inverse of the situation that has driven steel stocks to new highs over the past few years. Now as the demand from China turns into supply, dynamics are shifting to a more difficult environment for domestic producers.

Steel stocks reacted negatively to the news as US Steel (X), Arcelor Mittal (MT), Steel Dynamics (STLD) and Gerdau (GGB) all lost ground on the day. Interestingly, NUE was actually up on the day as analysts from Merril and CSFB (among others) came to the defense of Nucor saying this news was already expected or that it didn’t matter in the long run. Nucor has a stock buyback plan in place and it is likely that the company used extra supply from stock sellers Wednesday to purchase a large amount of stock. This will give them a chance to laud their active use of cash to drive investor value when they report Q3 numbers (likely the week of October 15th).

I continue to be short NUE as well as MT and GGB in different accounts I manage. Macro forces still appear to offer little reason to be optimistic, and if analysts for major Wall Street firms begin to pull their support back, there could be additional and possibly severe selling in these names.

Disclosure: Author has short position in NUE, MT, GGB