Balanced View on Nucor - Analyst Blog

On May 1, we issued an updated research report on steel maker Nucor Corporation NUE. While healthy momentum across automotive and energy markets coupled with the company's key projects should support results moving ahead, weak pricing and challenging steel market fundamentals remain concerns.
 
Nucor, on Apr 24, posted healthy first-quarter 2014 results. Both revenues and adjusted earnings for the quarter topped Zacks Consensus Estimates. Profit climbed year over year on the back of higher shipments.

Nucor expects improved earnings on a sequential basis in the second quarter. The company anticipates better performance from steel mills and fabricated construction product businesses despite the expected pricing and margins pressure at its Steel Mills segment.

Nucor, a Zacks Rank #3 (Hold) stock, is seeing strength across end markets such as automotive, energy, heavy equipment and general manufacturing. Demand across these end-markets is healthy, lending support to the company's top line.

Moreover, Nucor is progressing well with its key projects that are expected to boost its earnings power over the long-term. The Louisiana direct reduced iron DRI facility, its largest project, came online in Dec 2013. The $750 million plant is expected to produce 2.5 million tons of DRI annually when the operations are in full swing. The facility achieved peak operating rate of above 90% during the first quarter.

Nucor is also aggressively investing to secure a low-cost supply of natural gas on a long-term basis to cover its expected future steelmaking and DRI production needs. The company also has an impressive record of returning cash to shareholders.
 
However, the steel industry is still going through a difficult phase and market fundamentals remains challenging in the U.S. There is not enough demand for steel products due to persistent weakness in construction end markets, resulting in excess supply. Contributing toward this inventory glut are production ramp-ups by domestic steel producers and rapid growth in Chinese production.
 
Nucor, like other steel makers, is hobbled by surging domestic steel imports. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices.

Despite the U.S. steel industry's low capacity utilization, imports continue to flow into the domestic market due to foreign producers' overcapacity. Imported steel share of the domestic market increased to as much as 36% during the first quarter.

Other Stocks to Consider
 
Other companies in the steel and related industry with favorable Zacks Rank include NN Inc. NNBR, CIRCOR International, Inc. CIR and Precision Castparts Corp. PCP. While NN carries a Zacks Rank #1 (Strong Buy), both CIRCOR and Precision Castparts hold a Zacks Rank #2 (Buy).