Nucor Corporation (NUE), the second-largest steelmaker in the U.S. in terms of production, released its quarterly earnings yesterday. Like most of the other steel companies, its profit dropped significantly as a result of the deteriorating industry dynamics that have been prevailing lately. The company remains my best bet for a turnaround in steel industry, but, currently, long positions in its stock are not recommended as I don't see an industry rebound this year. A turnaround in the industry is expected at the end of the next quarter, which will provide investors an ideal entry point in the steel stocks.
Overview of the Steel Industry
The steel industry, as I already pointed out in the earnings review of Steel Dynamics (STLD), is suffering from severe overcapacity. That has been detrimental for prices in an environment where demand is low, as a result of slowdown in China and the debt crisis in Europe. I remain pessimistic about an improvement in steel demand in the near term as the global economy continues to grow at a lethargic pace. In fact, the steel industry is facing the problem of "prisoner's dilemma." A reduction in capacity would benefit all of the market players, but no single player is willing to cooperate and take the first step -- and therefore all are losing on their ends.
Nucor -- Earnings Review
Like Steel Dynamics, Nucor's profit also dropped as a result of a dip in average realized prices and production. The steelmaker's profit saw a year-over-year drop of 39% as it posted a profit of 35 cents per share as compared to 57 cents per share last year. Excluding one-time items, the quarterly profit was 45 cents, slightly ahead of the consensus estimate of 43 cents. The revenue also fell by about 9% to $4.8 billion, missing expectations by $70 million. The following table is a summary of other major figures:
Average sales price
According to management, Nucor's earnings were hugely affected by the political and economic condition in global markets, volatility in the prices of scrap, excess domestic supply of sheet and augmenting imports of steel in the U.S. The main concern is that the company is not expected to post good results in the next quarter. According to company officials, "We currently expect to see some further reduction in earnings exclusive of one-time charges for the fourth quarter."
While growth in the automotive, heavy equipment, and energy markets remained strong and steady, the construction market posed the biggest challenge to Nucor (the same way it has affected the other steel makers). This is a major concern given that construction activity accounts for a major portion of the overall demand for steel.
The following table compares Nucor with its peers: Steel Dynamics, U.S. Steel (X), and AK Steel (AKS). Despite being our favorite steel stock, we don't advise investors to take a long position -- at least not until the start of 2013.