Stock Analysis & Ideas

Everything Behind Nucor Stock’s (NYSE:NUE) Down Day

Story Highlights

It’s down, but not out. Nucor’s current position doesn’t look good for investors, but plans to expand will likely serve it well when economic recovery hits.

Steel producer Nucor (NYSE:NUE) is not having a good trading day on Wednesday, as the stock is down substantially. The biggest reason for this drop is disappointing guidance for the third quarter. The company offered up guidance suggesting it would hit earnings between $6.30 and $6.40 per share. This fell well short of analyst earnings estimates of $7.56 per share for NUE stock.

Nucor shares are currently off their highs but are still well above where they were this time last year. Back in September 2021, Nucor shares were down around $108 per share. Share prices rallied through the rest of 2021 before slipping in early January 2022 to the 52-week lows.

Explosive volatility followed that saw shares leap as high as $187 before falling and rallying several times up until the present day. Currently, shares are around the $128 mark.

Nucor’s forecast is in full retreat, but the reasons behind the retreat are pretty much what you’d expect, given current economic conditions. For now, I’m neutral on Nucor; things don’t look good right now, and they likely won’t for the near term. However, it’s a safe bet that the long-term will look a lot brighter for the company.

Investor Sentiment is Conflicted for Nucor Stock

Right now, investor sentiment metrics for Nucor are in direct conflict. Nucor has a Smart Score of 9 out of 10 on TipRanks. That’s not only the second-highest level of “outperform,” it’s also the second-highest score there is. That puts Nucor in an excellent position to do better than the broader market going forward.

While this is certainly the case among analysts and the like, Nucor’s own insiders seem much less convinced. Insider trading at Nucor is rather heavily sell-weighted, particularly in terms of informative sales.

Nucor insiders sold $7.1 million worth of stock in the last three months. In fact, that’s been the entirety of insider trading for the last three months – selling.

The last share purchase of any kind was an uninformative buy of an undetermined quantity staged by Chief Financial Officer, Treasurer, and Executive Vice President Stephen D. Laxton. Laxton staged a sale almost immediately thereafter.

The broader aggregate picture is somewhat better for Nucor, but only just. In the last 12 months, insiders staged 36 buy transactions, but 31 sell transactions. Buy and sell levels that are near-parity don’t suggest a great deal of confidence in the company. That’s particularly true when it’s the company’s own insiders engaging in such behavior.

A Bad Time to be in Raw Materials Processing

Here’s the biggest problem for Nucor as a whole: it’s a raw materials processor. It makes steel. Its ability to succeed as a company depends on other companies buying its products to use in their own products. So when other companies’ sales start to decline, so too, by necessity, must Nucor’s.

The macroeconomic conditions we’re currently facing all but preclude heavy steel purchases. Car makers are in open decline, to the point where dealerships are having a hard time finding cars. One report from the Delaware News Journal suggested that inventory levels at new car dealerships are getting worse.

In 2019, one lot typically had 80 cars available. In 2021, the average dropped to between 40 and 50. Back in July 2022? Five. Just five cars were on the entire lot for customers to purchase.

Another report from DeNooyer Automotive in Kalamazoo, Michigan, noted that cars really don’t “touch the lot” anymore. Most cars that would have gone on the lot are claimed in advance, with customers now pre-ordering their car of choice for delivery later.

That doesn’t exactly bode well for steel purchases. Meanwhile, durable goods orders stayed flat as of late August, and reports suggest that the 2022 holiday shopping season will be muted at best as shoppers struggle with high gas and grocery prices.

That won’t help matters either; without the impetus of holiday shopping to fuel sales, durable goods orders will likely remain flat or even decline somewhat.

Nucor isn’t going out without a fight, though. The company is committed to carrying out the largest capital investment the state of West Virginia has ever seen, locating a massive production facility therein. Meanwhile, the company is also planning a $100 million expansion at its Kingman, Arizona plant.

Is Nucor Stock a Good Buy Now?

Turning to Wall Street, Nucor has a Hold consensus rating. That’s based on six Holds assigned in the past three months. The average Nucor stock price target of $123.50 implies 3.17% downside potential. Analyst price targets range from a high of $145 per share to a low of $101 per share.

Takeaway: Nucor Stock isn’t a Great Investment at the Moment

Right now, things don’t look good for Nucor. The combination of terrible macroeconomic factors and reduced margins on metals is going to hit Nucor like a bus made out of Nucor’s own steel. Flat durable goods orders, declining car availability, and more are all contributing to a bad picture for Nucor right now.

Throw in the fact that Nucor is currently priced above even its average price target, and that doesn’t bode well, either. Stocks with downside risk don’t generally explode to the upside, so looking for growth here is probably going to be a bad idea.

That said, these conditions are likely temporary, and Nucor knows it. Nucor is also behaving accordingly; multiple expansion projects are in the works, and that’s going to mean Nucor can produce a lot more metal.

Believing that the current economic picture will turn around, at least someday, isn’t out of line. However, it doesn’t really work well for current operations. It’s clearly a lot more likely that Nucor shares will drop in the near term, for probably at least the next six months or so.

So for right now, I’m neutral on Nucor and staying out. It’s likely got a little more room to drop before it starts looking at recovery. Be ready for when that recovery happens, though; an expanded Nucor running on all cylinders with interested parties looking to buy steel will be the start of a renaissance for Nucor.

Disclosure

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