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Nucor: Strong Dividend And ESG Story
Steelmakers showed rapid growth against the background of record steel prices. $Nucor (NUE.US)$ left behind its closest competitors so that the share price more than doubled. On the contrary, other steelmakers have shown more modest results: $Cleveland-Cliffs (CLF.US)$ +65%, $United States Steel (X.US)$ +57%, and $ArcelorMittal SA (MT.US)$ +49%. Nucor looks quite expensive after the dramatic growth, trading with more than a 30% premium to the market.
Opportunity
Strong Financial Position
The company's revenue increased by 17.2% compared to Q2 2021 (109.2% YoY) and amounted to $10.31 billion. It exceeded analysts' expectations by $70.9 million. Moreover, the company reported Q3 EPS of $7.28, a new quarterly earnings record. Among key negative results, we highlight a 4% fall in shipment triggered a 2% stock correction.
What attracts investors to Nucor is its strong liquidity position and comfortable debt load while funding lots of strategic projects and executing a massive share repurchase program. Nucor's net debt is $3.38 billion, while EBITDA (TTM) reached $7.7 billion. Thus, the Net Debt/EBITDA is 0.43. According to 3Q 2021 results, the company has $2.29 billion in cash, short-term investments, and other equivalents.
If you look at the table below, you can see that Nucor has the best debt profile, EBITDA margin, and dividend yield compared to the United States Steel, Cleveland-Cliffs, and ArcelorMittal.
According to the consensus forecast, revenue and EPS will decline next year. For instance, revenue is expected to decrease from $36.7 billion to $32.6 billion. EPS expectations are even worse - a 30% fall.
However, we believe Nucor has an excellent chance to exceed market expectations due to two key factors. Firstly, the company invests heavily in new projects while increasing the product mix. According to the company, the company has successfully launched five projects over the past two years representing approximately $1 billion in CAPEX: rolling mill at Marion, Ohio rebar mill, the hot band galvanizing line at our Kentucky sheet mill, the specialty cold rolling mill at Arkansas sheet mill, and the rebar micro mill in Missouri.
The company is not going to stop there. The company spent $1.8 billion on acquisitions and capital spending in Q3 2021 alone. Jim Frias, CFO of Nucor, especially highlighted the new project in Kentucky:
Looking into 2022, our team constructing the $1.7 billion Brandenburg, Kentucky state-of-the-art plate mill is on track for startup late next year. Project-to-date capital spending totaled about $570 million. Located in the middle of the largest U.S. plate consuming region and able to produce 97% of plate products consumed domestically.
In the coming years, the company plans to increase capacity by more than 5 million tons. We assume the actual revenue data may exceed analysts' expectations and provide additional support to the company's shares in the long term. The company's management team addressed this issue during the last earnings call:
Today, we have significant projects under construction that will grow our sheet and plate capacity to more than 4 million and 1 million tons respectively further increasing our earnings power for decades to come. We are having a remarkable year in 2021, but it should not be missed than Nucor's ability to generate higher earnings per share is continuing to grow.
Secondly, steel prices remain high even after a slight correction. Not to mention massive infrastructure programs, where Nucor will be one of the key beneficiaries. These programs will have a positive impact on demand and support favorable price conditions in the markets.
New Markets And ESG
One of the main Nucor prospects is an active expansion of their product mix beyond core steel businesses. During the last earnings call, the company's management announced the purchase of new companies:
During the quarter, we acquired Cornerstone's insulated metal panels business as well as Hannibal Industries, a steel racking manufacturer. We're now able to offer a broad range of insulated metal panel products and racking solutions.
The acquisition of Cornerstone's and Hannibal Industries will allow Nucor to diversify its product offering to serve growing markets such as warehouses and data centers. According to Gartner, despite a 10.3% decline in data center spending in 2020 due to restricted cash flow during the pandemic, the data center market is still expected to grow year-over-year through 2024.
Among the positive aspects, it is worth noting the active development of ESG strategy within the company. We should notice an increasing role of ESG issues among various investors and funds. According to Morningstar, funds that use so-called ESG principles captured $51.1 billion of net new money from investors in 2020 -the fifth consecutive annual record.
Nucor has already launched a new line of net zero carbon emission steel products (Econiq). Moreover, the company announced an agreement with $General Motors (GM.US)$. The first deliveries will begin at the very beginning of 2022. Leon Topalian, CEO of Nucor, paid close attention to this partnership:
We're so excited with the partnership with General Motors, but we're also excited about the other interest in the companies that we're working with beyond, not just within the auto sector in other companies, but much wider. When we say at that scale, we're not talking insignificant tonnages, we're talking very significant tonnages that Nucor's going to supply into the Econiq family. And so, yeah, just stay tuned because that's going to ramp up very quickly.
On the one hand, we believe new products will allow the company to increase profitability because of the premium to the market price. On the other hand, we are sure Nucor can become the first choice for large-cap funds focused on ESG investing in the steel industry. We believe it can be an additional reason to add the company to your portfolio.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Dogoro777 : Maybe if they changed their name to Nucor Crypto steel or Metaverse steel ,they may fare better.
baby boomers : One of the best managed companies in the country. The author didn’t mention that all employees are in profit sharing and the relative flatness of the organization structure. Their annual report contains the names of all of their employees on the fold out cover. Have owned the company for decades. Only regret is I didn’t buy more.
hairless : Thank you this was an interesting article. Econiq has a lot of potential. I'm sticking with NUE long term, even with the higher-than-peers valuation that you highlighted so well. I do hope they are timing their buybacks wisely, with most companies that isn't the case.
Leoi : NUCOR is cheap and great balance sheet.
The other steel companies ( CLF, X ) are on way in 2022, to have equally good balance sheets. But those other companies are valued even lower now.
So the market instead of valuing the improving steel company valuation higher, is instead pulling the Nucor valuation lower !!
rppIg2As8t : Nice write up. Thank you. Your very well explanation on why NUE is 30 pct overvalued drives me to the conclusion X and CLF are way undervalued. Catalysts on X= new projects, stock buybacks. Catalysts on CLF= debt reduction, preferred buyback on jan15th, future dividends, Goncalves stock friendly policy. My2 cents