Nucor (NUE)


Key Statistics

Enterprise Value = $19.038 billion

Operating Income = $2.726 billion

EV/Operating Income = 6.98x

Earnings Yield = 13%

Price/Revenue = .68x

Debt/Equity = 44%

The Company

Nucor exclusively produces steel via minimills. Minimills take in scrap steel, vehicles, or equipment and melt them down in a furnace. Nucor uses electric arc furnaces, which heat the raw materials up to temperatures of over 5,000 degrees Fahrenheit to melt the metal down. The melted down steel is then re-purposed and sold. Nucor is the largest operator of steel minimills in the United States.

The cheap valuation is a result of the recent market sell-off combined with Nucor’s strong earnings in the last couple of years. The market seems to be indicating its belief that we are headed for a recession and steel demand is near a cyclical peak.

My Take

Nucor’s business prospects are driven by demand for steel and steel products. With strong US and global growth, Nucor has benefitted. A bet on Nucor is a bet that the economy will continue to grow and will not enter a recession. As I’ve stated previously on the blog, I do not believe that the US will enter a downturn in the next year.

I also think it’s possible that demand for steel can increase from current levels. With the Democrats seizing control of Congress and Donald Trump’s attitude towards deficits and spending, I think it’s possible that a big infrastructure bill could pass through Congress. This would be excellent for steel demand and could help boost earnings and sales from already strong levels. Infrastructure spending is probably the only area that Congressional Democrats and Donald Trump can find common ground.

Nucor has been expanding in recent years, pursuing a strategy aimed at growing its business. Recently on November 29th, they acquired a Mexican precision castings company called Corporacion POK, S.A. de C.V. In 2016, they acquired Independence Tube Corporation for $430 million. In 2014, they bought Gallatin Steel for $779 million in cash. The acquisition is in addition to Nucor’s investment in its existing capacity. They spent $230 million on a cold mill in their Arkansas facility, allowing it to manufacture more advanced low alloy steel products. They are also building new minimills in the United States, including a $250 million facility in Missouri. All of these efforts, I believe, will strengthen Nucor’s competitive position within their industry.

Nucor is financially healthy. They currently have a perfect F-Score of 9. The debt/equity ratio of 44% and the current ratio of 2.77x indicates that debt is at healthy levels. This is particularly impressive considering that they have been expanding and acquiring new businesses over the last few years. The Z-Score of 4.23 implies a very low risk of bankruptcy in the upcoming year.

Nucor’s valuations look favorable compared to its own history and its industry. The P/E of 7.9 compares to an industry average of 12.18. An increase to this level would be a 54% increase from current levels. Nucor’s average P/E over the last 5 years is 25.28. On a price/revenue basis, Nucor currently trades at 68% of revenue, compared to an industry average of 159%. On an EV/EBIT basis, Nucor trades at a multiple of 7x, compared to a 5-year average of 15.

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