Nucor Reiterated at Neutral (MTL) (NUE) (ROCK) (SHLO)

We are retaining our Neutral recommendation on Nucor Corporation (NUE) following its mixed first-quarter 2013 results. We remain on the sidelines considering the lingering impact of the Eurozone crisis and weakness in the company’s sheet steel business.

Why Retained?

Nucor’s first quarter adjusted earnings beat the Zacks Consensus Estimate while sales missed. Lower selling prices and shipments led to a double-digit decline in the top line. The company expects earnings to improve sequentially in the second quarter, partly driven by improved performance in its downstream business.

Nucor, a Zacks Rank #3 (Hold) stock, has a diversified client base and, as such, it is not highly dependent on the conditions prevalent in a particular geography. In addition, the company’s cost structure is highly variable, giving it the flexibility of adjusting its costs when required.

Nucor is seeing strength across end markets such as heavy equipment, automotive, general manufacturing and energy. It is progressing well with its key projects that are expected to boost its earnings power over the long-term. Construction of Nucor’s 2,500,000-ton direct reduced iron (DRI) facility in Louisiana, its largest project, is currently underway and is expects it to come online in third-quarter 2013.

However, the steel industry is going through a difficult phase and market fundamentals remains challenging in the U.S. There is not enough demand for steel products due to persistent weakness in construction end markets, resulting in excess supply. Contributing toward this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.

Nucor, like other steel makers, is plagued by surging domestic steel imports. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices. Moreover, the gloomy conditions in the Eurozone are another area of concern for Nucor since it is the largest market for total U.S. exports. All these factors are hurting Nucor’s profitability.

Other Stocks to Consider

Other companies in the steel industry with favorable Zacks Rank are Gibraltar Industries Inc. (ROCK), Shiloh Industries Inc. (SHLO) and Mechel OAO (MTL). While Gibraltar and Shiloh Industries carry a Zacks Rank #1 (Strong Buy), Mechel holds a Zacks Rank #2 (Buy).