Weakness in the steel market has turned out to be a headwind for Nucor (NUE, Financial). The company has now been forced to bring abrupt changes to its near-term outlook. Despite the grave situation, management believes that it will not affect the company too much as Nucor is counting on energy to be a key driver for steel demand in the U.S. Considering the growth in the energy market, Nucor seems positioned for a better performance in the future.
Positive signs
Nucor is seeing many positive signs gathering for it in the North American market. The energy costs in this region has always been low and the company is thinking that it will ramp up the U.S manufacturing activities also improving the customer spending. This is expected to drive Nucor’s performance in the upcoming quarters.
However, this journey doesn’t seem easy for Nucor as it is expecting some near term headwinds. The main reason for Nucor to worry is the surging imports. According to the recent estimates, the import of finished carbon steel products is expected to increase by 34% to an unacceptable level 34 million tons. In 2015 it is expected to increase further. Nucor is however thinking these to be just a near-term headwind, but the company is optimistic and is well prepared for better gains in future.
Looking beyond the headwinds
But Nucor has entered 2015 on a weak note due to near-term headwinds which are further triggered by the collapse in oil prices that resulted in reduction among pipe and tube producers. But in the later fiscal year, Nucor is expected to regain the lost momentum. Despite these headwinds there are some bright spots for the company. The company is enjoying a good financial strength which is clearly evident from its impressive balance sheet.
On the back of this, Nucor is expected to deliver healthy cash flow generation. This will strengthen its position and will help it to allocate its shareholders value to the most attractive and optimal usage. The attractive balance sheet will also ramp up its investments in the projects even in the soft market conditions. All these efforts by Nucor are expected to attract many investors, significantly improving its market share in the long term.
To hold good margins even in the soft market, Nucor is trying to maintain an effective cost structure which will improve its margins. Besides this, Nucor is seeing good improvement in the non-residential construction activity which will further improve the demands for iron and steel, giving Nucor good improvement in the financial performance.
Conclusion
Moving to the fundamentals, the stock with a trailing P/E of 21.54 seems reasonable at these valuation levels while the forward P/E of 13.54 indicates steady earnings growth in the near term. on the other hand, Nucor appears to be a good long term holding as its earnings in the next five years are growing at a CAGR of 18.27% which is far better than the industry average of just 2.22%. Considering all these points I would like to suggest the investors to definitely pick Nucor in their portfolio as its both near and long term aspects looks strong.
