With a 14% decline in the revenue, Nucor (NUE, Financial) ended fiscal 2014 on a disappointing note. The main reason behind this weakness was weak oil pricing that led to weak energy demand. In addition, the company was also disappointed by a 5% decline in the selling price which hurt its margins. Nucor is now trying to uplift its performance by taking various initiatives. But there are many near term headwinds also to which the company is exposed to. Let us have a detailed look at Nucor’s position in the market and the strategies which it is undertaking to improve its profitability.
Headwinds to watch
The main headwind that the company might face is the growth in the imports. The increase in the imports have affected the steel market negatively. This is not enough as Nucor’s sheet mills has suffered decline in the production in the past and the company thinks it will continue in the future as well. This will surely affect Nucor’s top line in the upcoming quarters.
Moving deeper there are some other issues also that can be grave for Nucor if not rectified. According to the recent updates, the company is engaged in convincing the government to impose harder measures against the steel imports as with the ramp up of steel import in the U.S by 28% in 2014 has affected the steel industry as a whole. The situations for the steel companies can worsen if government doesn’t come up with a concrete solution to this problem.
This has also affected the stock performance on the exchange. If we look at its performance in the last one year, the stock has declined by 3.1% which is disappointing. The management thinks that a favourable decision by the government regarding the import issue can help it to regain its lost glory on the stock exchange in future.
Positive signs
Despite these headwinds, there are certain positive signs also which can help Nucor to improve in future. It is mainly counting on non-residential construction segment which is improving at a steady pace. The past growth clearly indicates that this segment is promising and Nucor can definitely count on it. The profitability for the segment has increased to more than $32 million as compared to a value less than $2 million last year. In addition, Nucor is definitely counting on booking backlogs and backlog margins which have significantly grown on a year over year basis and are expected to further improve in 2015.
Moving forward, according to the recent forecasts, the analysts are expecting the oil prices to recover well by 2016. Though they are sure about the longevity of the recovery but they are sure about some improvement in the oil prices. This ramp up will surely improve the demand for steel in the long term giving Nucor better chances of a better financial performance.
Conclusion
Now moving to the fundamentals, with a trailing P/E of 22.32 the stock looks reasonable while the forward P/E of 16.3 shows steady earnings growth in the near term. The stock can also be a long term holding as its earnings for the next five years are growing at a CAGR of 16.61% as compared to the industry average of just 1.26%. Considering all these valuation levels Nucor looks in good shape and is a good pick as of now.
