Nucor Stock: A Fantastic Steel Play Right Now (NYSE:NUE)

Investment Summary

The steel industry might not be the most exciting or what is being talked about when it comes to investing news, but one thing the industry has is consistency. The industry traditionally trades at a lower multiple around 8 – 10x earnings. The appeal of Nucor Corporation (NYSE:NUE) is to be in a company that accentuates consistency and is still able to grow over the long term. Comparing the results on a year-over-year basis can sometimes do injustice to the actual performance, which I think is the case with NUE. They saw sales drop from $10.49 billion in Q1 2022 to $8.71 billion in Q1 2023. This is the result of lower steel prices but it shouldn’t set off alarm bells for investors. Long-term the picture remains strong as NUE noted their largest end market, nonresidential construction is still seeing significant investments.

Nucor is one of the largest steel companies in the US and has over the last few years returned a lot of value to shareholders through both dividends and buybacks. The management of NUE is experienced and has helped deliver strong delivery results to the start of 2023. The FWD p/e sits below the average 5-year of 10.2 which makes the current price appealing to get in at, this makes NUE a buy for me.

Strong Steel Demand

Right now the discrepancy of the revenue between the segments in NUE is not that large. They generate 52% of revenues from steel products and 45% from steel mills, whilst the remaining part comes from raw materials. NUE was founded back in 1902 and has since then built up a strong portfolio of product it offers.

To the start of 2023, NUE showed that steel demand remains very strong, and for their second largest segment, the steel mills saw overall shipments increase by 4% YoY, and 18% sequentially. As for the steel products segment shipments were down by 8% YoY but the earnings/ton increased by 54% YoY, highlighting the robust pricing environment in which NUE sells.

Supporting the steel demand are several federal initiatives. In total the value of the federal funding programs, concerning steel is $975 billion, presenting NUE with a massive opportunity to still plenty of growth in the coming decades. In recent years reshoring is taking more shape and many companies are moving production and manufacturing back to the US to cut down on the supply chain route. In the long run, it should benefit NUE as they now face even more demand from companies seeking to establish supplies.

Quarterly Result

For the last quarter, NUE had a robust performance that highlighted the efficiency of the business and its ability to still deliver when prices are less favorable. Comparing the results on a YoY basis would show an NUE had significantly lower earnings this time around, but that can be contributed to the average price per ton decreasing 18% YoY. This didn’t stop NUE from still diverting a lot of earnings towards ensuring investors are getting some value. In total, 49% of the earnings in Q1 2023 was returned to shareholders.

As for the outlook for Q2 2023, the earnings are expected to see an increase and the repurchase program will continue. Pricing is also expected to recover somewhat which should result in better margins in the coming quarters for 2023 for the steel mills segment. What I will be looking for isn’t necessarily the results on a QoQ basis, but rather that they keep up with their long-term trajectory of growth. Demand will be there as steel products will continue to be used in various end markets, and the most important one to NUE being nonresidential construction is expected to see building starts steadily increase until 2027. Nucor is more of a value play for investors and focuses lies on its ability to distribute profits to investors rather than posting results like a high-growth company.

Risks

With commodity companies, you are subject to some challenges regarding having consistent growth. Prices dictate this heavily and if there remain unfavorable the only way to offset this would be higher production volumes, which NUE has somewhat been able to do.

Where the risk comes into the picture with volatility commodity prices is that sometimes you might be buying at the higher end of the cycle, which would mute potential investment appreciation. Right now though I think the heavy investments that are pouring into construction are offsetting some of these risks and NUE is in my opinion still at a good price to invest. Debt for example is unlikely to become an issue, as NUE holds cash equal to more than half of the long-term debts. That enables NUE to be quite liberal with spending and making acquisitions.

Strong Returns To Shareholders

My main appeal with NUE is the fact that they have a fantastic history of returning value to shareholders through both buybacks and dividends. The last quarterly dividend was the 200th consecutive for the company.

In recent years too, NUE has heavily been buying back shares and in Q1 2023 they bought back 2.7 million outstanding shares. In the last 5 years, NUE has bought back 22% of the outstanding shares, representing a 4.4% yearly decrease, and together with a yield of 1.24% right now, NUE looks like it could outperform heavily in the long term because of these practices.

Valuation & Wrap Up

Right now NUE is trading below its 5-year avenge p/e of 10.2. It should be said that the forward p/e of NUE is 9.4, up from the TTM one of 6.4. As a result, steel prices are lower which forces NUE and other companies to compensate with stronger and higher production levels.

The valuation still looks appealing for inventors seeking a different type of exposure to major trends like the increase of new homes being built. Nucor has gathered up a significant portion of the market share, around 36.9% which I think they can leverage into growing at the same pace as the steel industry and eventually outperform in terms of investment appreciation because of buybacks and dividends. This all concludes with me rating NUE a buy right now.