Mini-Mill Steel Producer Nucor Is A Buy

| About: Nucor Corporation (NUE)

At a time when many producers of metals are having a difficult year, there are still a few sectors and companies that are worth considering for the purposes of investment. For instance, the stocks of mini-mill steel producers have actually performed reasonably well in contrast to some other steel producers such as United States Steel (NYSE:X). A mini-mill produces steel by melting scrap metal, which has been recycled from sources such as junked automobiles. Other steel producers use blast furnaces to produce steel from the raw materials.

About Nucor

Nucor (NYSE:NUE) is the largest mini-mill in the United States as well as simultaneously being the largest steel producer in the country. It is one of the largest recyclers in North America and produces almost 20 million tons of steel every year from recycled steel scrap. Its products are used for a variety of purposes including beams and concrete reinforcement. The company grows by continuously increasing efficiency and developing new technology in addition to the acquisition of companies that will add value. The latest acquisition has been Skyline Steel, the distributor of steel foundations, last year for $684 million and the benefits should be reflected in the company's financial results for 2013.

Second-quarter estimates

Profit is expected to dip in the second quarter but analysts continue to be optimistic about the prospects of the company. Estimates project that the company will report an EPS of $0.30 per share compared to $0.45 per share in the same quarter of the previous year. Three months ago, the estimates stood at $0.48 per share and EPS for the fiscal year is expected to be $1.64 per share. The analysts also anticipate that revenues for the quarter will be $4.59 billion, 10% below the figure of $5.10 billion one year ago. Revenues for the year are expected to be $18.84 billion. Nucor has been profitable for the last two years though net income has been declining for the past four consecutive quarters. Of analysts following the company, 64% have a buy rating compared with 31% for its nearest competitors. Only one analyst has given a sell rating.

The opportunities from low gas prices

The present shale and natural gas prices present opportunities for direct reduced iron ((NYSE:DRI)) and steelmaking and Nucor should be one of the beneficiaries. In several countries such as Mexico, and Saudi Arabia, natural gas and iron ore are combined to make direct reduced iron, which is then added to scrap to produce steel. The use of DRI avoids the necessity of using coking coal and, if gas prices are low, the cost savings can be significant when compared with conventional steelmaking techniques even though more electricity is used compared with using 100% scrap. The company is approaching the completion of a new DRI plant and the company says that the new facility will be a game changer in the cost of producing high-quality iron. Voestalpine (OTCPK:VLPNY) of Austria has said that it would invest about $740 million on a new DRI plant on the coast of Texas. The plant will produce 2 million tons every year of which half will be transported to Austria to be turned into steel. It should be noted that integrated steel producers will not achieve the same cost effectiveness as mini-mills.

The bottom line

On the face of it, Nucor looks expensive because it is quoting at an earnings multiple of more than 30 times trailing earnings. However, the industry itself looks as if it is recovering, leading to better margins and profits in the future. The company is expected to show an EPS of $1.72 per share in 2013, rising to $3.80 per share in 2014, and $4.41 per share in 2015. On the basis of 2014 earnings, the multiple drops to the far more reasonable figure of just over 12. The recovery of the industry is by no means a cast iron certainty though all the available data seems to suggest that the trend is certainly upwards. There's also the prospect of an immediate upside because against the current price of approximately$44.76, analyst estimates suggest a mean target price of $50.15 and a median target price of $52.50. In addition, there is a dividend yield of approximately 3.3%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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