KeyBanc's Gibbs Cuts Rating On Nucor Corp After New Guidance

KeyBanc Capital Markets’ Philip Gibbs downgraded the rating for Nucor Corporation NUE from Overweight to Sector Weight, while removing the price target. He expressed concern regarding the company's lackluster 1Q outlook, higher scrap costs, weaker plate/bar pricing, and higher corporate SG&A.

Nucor projected FIFO profitability in 1Q to be "somewhat similar" q/q, implying 1Q FIFO EBITDA guidance of ~$251M and $237.4M on a LIFO basis, analyst Philip Gibbs said. He added, “If taken literally to mean flattish, this is ~40% below the Street's LIFO of $400M and 34% below our prior $362M.”

The 1Q EBITDA estimate has been reduced from $362M to $325M to reflect higher scrap input costs. Although Nucor’s guidance has historically been conservative, this time it appears significantly short of expectations, Gibbs commented.

The LIFO EBITDA estimate for FY16 has been reduced from $1.9B to $1.6B, versus the Street's $1.9B. The reduction reflects a more lackluster 1Q baseline and higher scrap cost assumptions. The LIFO EPS estimates for 1Q and 2016 have been reduced from $0.27 to $0.20 and from $1.89 to $1.25, respectively.

“NUE noted in its 10-K that despite macro headwinds, it sees 2016 to be on par with 2015 from a sales and profit perspective (ex-LIFO), implying LIFO EBITDA around $1.3B (>30% below the Street). We see this as conservative, likely embedding weaker Steel volumes vs. our +5% YOY view and a mark-to-market of scrap inputs (and perhaps some potential modest inflation),” Gibbs wrote.

The analyst believes that solid FCFE, dividend yield support, and long-term opportunities for market share gains would offer downside protection to Nucor’s shares.