Summary
- Recent negative industry headlines present an opportunity to buy a quality company at a very reasonable price.
- Nucor has the strongest balance sheet and credit ratings in the industry.
- Nucor stock currently meet's Ben Graham's "The Intelligent Investor" criteria as an acceptable investment for the defensive investor.
- Nucor's Current yield is in excess of the S&P 500 median.
Nucor Corporation (NUE) is a manufacturer of steel and steel products. Steel-making has historically been a very cyclical industry with volatile end-market demand and pricing, and foreign production impacting pricing for domestic mills. Barron's recently reported that NUE and Steel Dynamics (STLD) each issued updated 2Q19 guidance that was below expectations while United States Steel (X) announced the idling of two of its blast furnaces because of weak demand.
Warren Buffett has famously advised investors to be fearful when others are greedy and greedy when others are fearful. With the major indices approaching all-time highs, I believe there may be an opportunity in a drab, old-school, basic industry company like NUE.
NUE manufacturers steel primarily from scrap using electric arc furnaces, continuous casting and automated rolling mills. It is the largest recycler in North America, using scrap steel as its primary raw material. It takes approximately 1.1 tons of scrap and scrap substitutes to produce a ton of steel, so electric arc furnace mill producers are sensitive to changes in scrap metal prices, but tend to have lower capital and fixed operating costs than large integrated steel producers. Another significant cost is natural gas. NUE owns an interest in natural gas fields. Sales from those fields offset approximately 15% of its natural gas purchases in 2018. NUE also operates scrap brokerage and processing facilities to help source raw materials for its mill operations. NUE claims to be North America’s most diversified steel producer. (All background material here and below is from NUE's public filings. The most recent 10K can be found here.)
NUE sells its steel mill products primarily to steel service centers, fabricators and manufacturers. Sheet steel and bar steel make up about 45% of NUE’s revenues and 75% of 2018 sheet steel sales were to contract customers, but contract sales outside of its sheet operations are not material. No single customer comprises more than 5-6% of NUE’s annual sales. NUE sells into 24 end markets, and at year-end the company indicated 20 of these sectors are improving, with three stable and one declining. More recently, NUE reduced its guidance for 2Q earnings and noted that while “most” end-use markets remain steady or strong, “many” customers are sitting on the sidelines, and that “service center destocking is impacting order rates.” NUE indicated it expects auto OEMs’ and suppliers’ volumes to be down this year. See NUE's complete investor day presentation here.
