Nucor: a Strong Buy

Nucor (NUE) announced first quarter ended April 30, 2016 net sales of $3.7 billion, down 16 percent year-over-year from $4.4 billion during the same period last year, but grew 7 percent sequentially from $3.46 billion in fourth quarter of 2015.

Nucor declared first quarter of 2016 net earnings of $70.8 million or $0.22 per diluted share, down 4.4 percent year-over-year from $67.8 million or $0.21 per diluted share in first quarter of 2015. Going forward, the company also provided net earnings guidance for second quarter of 2016 and estimates it to be in the range of $0.65 to $0.70 per diluted share.

The key steel manufacturing company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with expanding mining and exploration costs, eating into the company’s key margins.

Nucor has notable financial strength with robust generation of cash flows all through the operating cycle coupled with being the only steel producer in North America with an investment grade credit rating.
The steel producer successfully achieved this attractive financial position by uniquely adopting conservative financial approaches with no significant legacy liabilities. Going forward, Nucor is developing superior earnings power through excellent operational execution and expected to soon deliver next recurring peak earnings.

The positives     

The steel producing company is believed to be a low-cost producer, delivering excellent returns and exceeding the industry’s average much ahead of several of its key competitors. Nucor has extremely handy low-cost raw materials supply sources with raw materials supply chain from the David J. Joseph Company and Direct Reduced Iron ("DRI") from Nucor Steel at Louisiana and Nu-Iron at Trinidad. Nucor’s unique competitive advantage lies in its differentiated product mix being offered to the customers globally and comprising of sheet, bars, downstream products, raw materials, structural and plate.

Nucor’s robust financial position in addition to an extremely well-diversified product mix provides the company with an industry-leading position in terms of size, number of customers and overall growth.

Nucor is strategically expanding its channels across a variety of customers with the percentage of steel shipments to key internal customers uniquely doubled since 2006 from 8% to 16% in 2015. Moving ahead, the global steel manufacturer is impressively investing for delivering profitable growth and including significant investments in strategic acquisitions and major capital expenditures despite a sharp ongoing steel industry slowdown of 2009 till 2015.

A smart approach  

The steel major is executing a well-planned capital allocation approach which is extremely well balanced across operating cash flows, invested capital and capital returned with a majority of capital reserved for continuing with the company’s daily operations profitably while delivering attractive shareholder returns. Further, during the economic up-cycle from 2004 till 2008, Nucor uniquely returned a total of $4 billion to the key stakeholders in the form of dividends and strategic share repurchases. Moreover, despite the continuing steel industry downturn from 2009 and till date, Nucor has consistently delivered base dividends over the years which is in line with its continued commitment to deliver attractive shareholder returns.

Nucor’s attractive capital allocation strategy targeted towards delivering sustainable long-term growth in addition to offering impressive shareholder returns is believed to increasingly attract new investors towards the key growth stock and steadily harness higher returns.

Conclusion

Overall, the investors are advised to “Buy” equity in Nucor Corporation considering the company’s significant long-term growth prospects with PEG ratio of 0.96, somewhat better than the industry’s growth average of 0.26 only. The profit margin of 2.29% also seems satisfactory. However, Nucor needs to optimize its debt-burdened balance sheet with significant total debt of $4.37 billion against weaker total cash position of $2.33 billion only, restricting the company to make future growth investments.
Published on Jul 19, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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