We maintain our neutral recommendation on Nucor Corporation (NUE) as the company’s focus has been on profitable growth through acquisitions over the past several years. Nucor plans to continue to seek attractive opportunities to acquire businesses, forge joint ventures and make other investments that are complementary to its existing strengths. Realizing the anticipated benefits of acquisitions or other transactions will depend on its ability to operate these businesses and integrate them with its operations and cooperate with its strategic partners.
Nucor reported a huge increase in profit to $0.56 per share (excluding special items) for the first quarter of 2011 compared with $0.15 in the same quarter of 2010. The result surpassed the Zacks Consensus Estimate by $0.21 and the company’s own guidance of $0.30 to $0.35. We believe NUE’s strong cash flows and balance sheet will provide flexibility to continue with its growth strategy.
Nucor expects its second-quarter results to outpace the first quarter, despite some market weakness that may impact results toward the end of the period. Furthermore, the company continues to see slow but steady improvement in real demand in certain end-markets. Even though long-term contracts, cost reduction efforts and a dominant acquisition strategy could benefit the company in the coming quarters, the massive industry over-capacity continues to weigh on steel prices. As such, there is a bleak overall near-term price outlook. At current levels, we do not expect a further slide in the stock price.
Utilization rates have improved tremendously since the fourth quarter of 2010 and are expected to improve further in the coming quarters. As the company returns to profitability, the recent price increases for all steel mill products are expected to have a positive impact on earnings. We believe end markets are experiencing some real demand improvement that that are expected to continue throughout 2011.
However, overcapacity in the global steel industry has forced steel manufacturers to export steel and steel products at prices below their cost of production, thereby impacting profitability. Although an improving trend could be observed in automotive steel demand, housing and construction demand are still weak. The slowdown in steel demand and increased Chinese production are matters of concern. The Chinese steel output has outpaced demand, causing excess supplies and higher inventories. Industry overcapacity and weak demand also weigh on steel prices. Steel producers like Nucor are highly susceptible to volatile steel prices.
Nucor suffers from inflated raw material costs. Lower production rates at the mills have slowed the rate at which they consume the higher cost iron units, in particular, pig iron inventories. However, pig iron consumption had increased midway through 2009. Nucor is facing higher scrap and scrap substitute prices. Scrap and scrap substitutes are the most significant elements considering the total cost of steel production. Nucor believes it will continue to experience volatile raw material costs during 2011, as the end-markets are experiencing some real demand improvement that will continue throughout 2011.
Major competitors of Nucor Corporation are United States Steel Corporation (X) and Sumitomo Metal Industries (SMMLY).
The most challenging markets for its products are associated with residential and non-residential construction. The company retains a Zacks #3 Rank on its stock, which translates to short-term “Hold” recommendation.
NUCOR CORP (NUE): Free Stock Analysis Report
Be the first to comment