Nucor: Diversification and Partnerships Will Drive GrowthNUE) has struggled this year due to a weak global commodity environment and poor demand for steel and steel products, which is oversupplied due to higher inventories and diminishing margins. However, there are a number of positives about the company that investors should not ignore. Let’s take a look.
A key partnership to drive growth
Nucor Corporation and Trimble recently declared a third, multi-year deal to extend their partnership in the construction, engineering and architecture markets that started in 2009.
The agreement of Nucor with Trimble is believed to significantly benefit the former in adopting technological advancements across all its business segments and thus controlling the rising costs while expanding steel production. Nucor is estimated to be focused on maintaining a healthy balance sheet with significant cash flows by minimizing non-core expenses, which would encourage the steel major to plan for new growth investments while delivering improved shareholder returns.
Strong liquidity and superior growth
Nucor’s operating cash flow has improved significantly from approximately $495 million on an average from 2001 till 2003 to more than double the average operating cash flows of nearly $1.1 billion generated during 2009 till 2013. The company is also believed to have an investment grade credit rating with no significant legacy liabilities in the near future.
In addition, Nucor has delivered robust operating cash flows through the cycle, totaling approximately $2.1 billion since last one year and strategically allocated $779 million in Gallatin Steel acquisition, $477 million returned to the key stakeholders, enhanced its liquidity by $463 million and executed about $381 million of capital expenditures.
In addition, Nucor is observed to be having the highest 14.9 percent of average return on invested capital (ROIC) over the years from 2004 till 2014. The steel producing major is expected to be the North America’s most diversified steel producer with extremely well-diversified sales during 2014 in tons. This diversified product mix is forecasted to increasingly draw several new customers and thus expand the company’s target markets.
The well-diversified product mix, coupled with a balanced capital allocation program, is expected to significantly grow its customer base and thus deliver improved profitability.
Finally, another positive that investors can count on about Nucor is its valuation. The stock trades at 19.95 times last year’s earnings and has a forward P/E ratio of 13.74. The company’s forward P/E ratio is at par with the industry’s average P/E of 13.21. Though Nucor needs to reduce its debt figure of $4.43 billion, which is higher than the cash position of $1.69 billion, the rest of the aspects about the company seem to be in good shape. Hence, investors can consider buying Nucor for the long run.
Published on Sep 26, 2015By Yaggyaseni Mittra