On Aug 1, we issued an updated research report on steel maker Nucor Corporation (NUE). While the company’s strategic investments in a slew of projects coupled with its efforts to expand capacity should support results moving ahead, challenging steel market fundamentals continue to weigh on its prospects.
Nucor, on Jul 24, posted healthy second-quarter 2014 results. Both revenues and earnings for the quarter topped Zacks Consensus Estimates. Profit was driven by improved performance of the company’s steel mills business.
Nucor expects improved earnings on a sequential basis in the third quarter. The company anticipates higher operating profits in its downstream products businesses in the quarter.
Nucor is progressing well with its key projects that are expected to boost its earnings power over the long-term. The Louisiana direct reduced iron (DRI) facility, its largest project, came online in Dec 2013. The $750 million plant is expected to produce 2.5 million tons of DRI annually when the operations are in full swing.
In addition, the Nucor-Yamato structural mill recently completed a roughly $115 million project, offering expanded sheet piling production capabilities. Nucor is also aggressively investing to secure a low-cost supply of natural gas on a long-term basis to cover its expected future steelmaking and DRI production needs. Expanded DRI capacity combined with the company’s natural gas investments will enable it to grow in sheet and SBQ (special bar quality) markets.
Moreover, Nucor is seeing strength across end markets such as automotive, energy, heavy equipment and general manufacturing. Demand across these end-markets is healthy, lending support to the company’s top line.
However, the steel industry is still going through a difficult phase and market fundamentals remains challenging in the U.S. While non-residential construction activities are improving, the market remains way below its peak levels.
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, remains 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. Despite the U.S. steel industry’s low capacity utilization, imports continue to flow into the domestic market due to foreign producers’ overcapacity.
Other Stocks to Consider
Other companies in the steel industry with a favorable Zacks Rank include Grupo Simec S.A.B. de C.V. (SIM), United States Steel Corp. (X) and Olympic Steel Inc. (ZEUS). While Grupo Simec carries a Zacks Rank #1 (Strong Buy), both United States Steel and Olympic Steel hold a Zacks Rank #2 (Buy).
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