Stock Analysis & Ideas

Why Nucor (NYSE:NUE) Faces a Dull Near-Term Outlook

Story Highlights

Low steel prices, dwindling demand, and persistent supply shortages just scratch the surface. There are deeper concerns looming over Nucor’s neat-term prospects that are keeping Wall Street on the sidelines.

Leading steel producer Nucor (NYSE: NUE) recently warned of accelerated market headwinds that lead to lower shipment volumes and considerable contraction in metal margins in the third quarter of fiscal Q3. These setbacks forced the company to lower its earnings guidance for the quarter. Looking at how things are going for the U.S. steel industry, Wall Street prefers to wait till the tides turn to start buying Nucor shares.

Shares of the steel giant decreased over 11% last Wednesday when the outlook was slashed.

What Does Nucor Do?

Simply put, Nucor produces structural steel, steel bars, steel decks, direct reduced iron, etc., and has more than 27 million tons of steel capacity. Operating in three segments —Steel Mills, Steel Products, and Raw Materials —the 117-year-old company has 123 operating facilities across the U.S. and Canada.

Nucor’s steel products are used to build highways, bridges, reservoirs, utilities, hospitals, schools, airports, stadiums, and high-rises.

Some Near-Term Concerns to Consider

The supply of a major raw material for Nucor, pig iron, has been scarce ever since Russia invaded Ukraine. Both countries were key suppliers of pig iron to the U.S. With the reduction of trade with Russia and halted shipments from Ukraine, the U.S. is not getting enough of the raw material. This is a big spoiler for Nucor. These logistical constraints are likely to continue weighing on the company’s production.

Moreover, elevated costs in scrap metal, natural gas, labor, and electricity are a big source of margin concerns. These are likely to continue until at least the rest of this year.

Steel prices have recently corrected sharply, partly due to dwindling demand caused by recession fears. After swelling to nearly $1,500 per short ton in April this year, the benchmark hot-rolled coil (HRC) prices started to slide and currently stand at around $795. The lower the HRC price, the lower the margins are for Nucor. This is what was factored into its latest guidance cut.

Also, the $6.62 billion in long-term debt on its balance sheet, coupled with only about $2 billion in cash and equivalents, is not good for the company’s near-term financial flexibility.

Analyst Cautious of Nucor’s Prospects

Post the announcement, BMO (NYSE: BMO) Capital Markets analyst David Gagliano analyzed the company’s fundamentals and lowered his estimates for the third quarter and full-year Fiscal 2022.

The analyst acknowledges that Nucor’s diversified product mix and variable cost structure provide some level of hedging. He realizes that “the company is quite susceptible to falling prices and tepid demand.

“We suspect this will mark the beginning of a challenging ‘mid-quarter update’ season for the steel producers. In 3Q, we suspect the combination of meaningfully lower customer purchasing activity and falling prices translated to lower-than-expected ASPs (average selling prices) and higher-than-expected unit costs for Nucor’s sheet (and potentially previously resilient plate) businesses.”

The analyst, however, was encouraged by the company’s continued expectations that 2022 could end as the most profitable year in its history. “Not a total surprise, given 1Q’22-3Q’22 EBITDA totals nearly $9.5B by our estimates, vs. 2021 (the most profitable year thus far) of $10.2B,” recalled Gagliano.

Although the analyst thinks that the company is on track with its multi-year organic growth plans, he judges the stock as a Hold, given that it is approaching its fair value. Gagliano set his price target at $130.

Is Nucor a Good Stock to Buy, According to Analysts?

Looking at Wall Street’s skepticism, the answer would be no. NUE stock has a Hold consensus rating based on one Buy and five Holds. Nucor’s price target is $123.20 currently, indicating upside potential of 5% from current levels.

Conclusion: Wait for a Better Entry Point

The U.S. steel industry is being weighed down this year, and inevitably, Nucor is being affected. However, given that Nucor is the largest in the U.S. and the “best-in-class steel producer,” according to Gagliano, the company has the potential to be a good long-term investment. However, it will be wise to wait for a more favorable valuation, as its price might fall further over the next few months.

Disclosure

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