On Feb 6, 2015, Zacks Investment Research downgraded steel giant Nucor Corporation (NUE) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Nucor, which reported fourth-quarter 2014 results last month, saw its profits jump 23.4% to $210.4 million or 65 cents a share. However, Nucor’s adjusted earnings were 54 cents per share for the fourth quarter. By that measure, earnings missed the Zacks Consensus Estimate by a penny. Revenues increased 2% in fourth-quarter 2014 to roughly $5 billion from $4.9 billion in the year-ago quarter. Sales, however, missed the Zacks Consensus Estimate of $5.45 billion.
The Zacks Consensus Estimate for earnings for Nucor for the current year has decreased 17.4% to $2.95 per share following 9 downward estimate revisions over the last one month. Similarly, the Zacks Consensus Estimate for the first quarter of 2015 decreased 24.6% to 52 cents per share, following 6 downward estimate revisions over the same time frame.
The biggest obstacle in the path of persistent growth and profitability of the steel industry is its excess capacity. The industry is under relentless pressure, caused by years of excess steel-making capacity, further aggravated by weak demand and uneven economic growth. Moreover, demand in China – which alone accounts for almost half of the total steel consumption – has slowed down due to the country's tepid property market and weaker infrastructure investment growth.
Again, U.S. steel imports went up by more than 35% in the first ten months of 2014, reaching a record high of 4 million tons in October. These cheap imports are hurting the margins of U.S. steel players in the industry.
Currently, steel is the major raw material for the auto industry, the second largest steel consumer. Major automakers and others in the industry as a whole are also becoming increasingly aluminum-intensive, given the metal's recyclability and light-weight properties. Increased use of these as substitutes for steel products could have a material adverse impact on prices and demand for Nucor’s steel products.
However, Nucor believes that there is a positive trend in non-residential construction markets, benefiting its steel mills and fabricated construction products businesses. Typical seasonality is expected to affect performance in the company’s downstream products business on a sequential basis in the first quarter of 2015.
Stocks to Consider
Better-ranked companies in the basic materials sector include Kobe Steel Ltd. (KBSTY), LB Foster Co. (FSTR) and Newmont Mining Corporation (NEM). While Kobe Steel sports a Zacks Rank #1 (Strong Buy), both LB Foster and Newmont Mining carry a Zacks Rank #2 (Buy).
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