In the face of an unstable macroeconomic environment, Nucor (NUE, Financial) is counting on the non-residential construction, which is growing steadily at a slow pace. This is clearly evident from its numbers in the recent quarter as its profitability for the segment increased to more than $32 million, compared to a value less than $2 million last year. Also, bookings backlogs and backlog margins have reported significant growth on a year over year basis in all three major fabricated construction products, namely joist and decking, fabricator rebar and metal buildings. The results are encouraging and the segment will contribute further in its growth in the days to come.
Looking past the problems
In the near term, the company will face some headwinds on account of various factors. First, its DRI facility was completed a one month maintenance work, affecting its production. Nucor had encountered some problems on account of a technical snag at the facility. Rectifying this, it made modifications to the process gas heating’s original design that will prevent the re-occurrence of a similar failure. The company has restarted operations and once the production is in full swing at the facility, it will be a growth engine for the company.
Secondly, its hard rolled steel market was severely affected on account of surging imports, coupled with extreme inventory correction underway in the energy pipe and tube sector. Further adding to this pressure, its sheet mills experienced the largest production decline sequentially, which was led by a 65% reduction in its capacity utilization during the first quarter. This has significantly affected its top line over the period.
These were the headwinds on the internal side and the company is working on it and we could expect some improvement in the coming months. But the real challenge is external as the company is trying to convince the government in imposing harder measures against steel imports. As per Bloomberg:
“The amount of imported steel used in the U.S. has swelled in the first two months of 2015 to 33 percent from 28 percent in 2014.” Curt Woodworth of Nomura Holdings said. “Imports have effectively taken all of the growth upside for the industry.”
This has subsequently affected its stock movement. If compared with the index, we will find that Nucor’s stock price have declined 3.1% this year, while S&P 500 Materials Index has grown 1.5%. Additionally, as the U.S economy recovers the dollar is gaining strength, which has also negatively impacted the steel makers in the region. These numbers paint a bad picture of the U.S steel industry.
Conclusion
As oil prices are expected to improve in 2016, we could see some increased demand from that segment. Also, as the company clears its own internal challenges it will further add to its growth. Nucor is the only North America's steel producer to hold investment grade credit rating, which is good news for investors looking towards this sector. The company currently has a trailing P/E multiple of 22.32, which improves on the forward basis with a P/E of 16.3. Therefore, in the light of these facts, it’s near term outlook could be disappointing but Nucor could be a good long term bet.
