Bank of America Merrill Lynch has downgraded Nucor Corporation NUE to Neutral from Buy due to a more cautious view on second-half market conditions, fuller valuation and cautious comments from Steel Dynamics, Inc. STLD on long products.
Justification
The downgrade comes as Nucor is scheduled to report its second-quarter results on July 21. The Street expects EPS of $0.70 on revenue of $4.50 billion.
"We continue to think NUE represents a relatively attractive investment opportunity within our coverage, but expect limited catalysts on falling steel prices and more recent full valuation," analyst Timna Tanners wrote in a note.
On Thursday's second-quarter call, the analyst said investors will focus on how much spare capacity Nucor might be able to contribute to a relatively tight sheet market after the company reportedly operated at 105 percent of capacity at its sheet mills.
"We expect benign market commentary, similar to STLD, although our channel checks indicate gaps of $145–200/t on delivered sheet imports relative to domestic prices. We would be keen for an update on NUE's plans for cash use given its also substantial cash hoard of $2.3 billion as of Q116," Tanners noted.
Meanwhile, the analyst added that Nucor has more long products exposure than Steel Dynamics, but less than Commercial Metals Company CMC at about 39 percent of 2015 sales, and has also been growing volumes in its fabricated segment.
Looking Forward
"NUE remains relatively defensive due to variable costs and LIFO earnings, which can help offset any hit from falling prices. It also tends to import scrap, so can benefit on the margin from a stronger dollar arbitrage on scrap costs," Tanners highlighted.
That said, the analyst cut 2016 EPS view to reflect expected long product margin squeeze into the second quarter and lower volumes in the third. Tanners lowered 2016 EPS forecast to $2.40 from $2.45. The analyst also trimmed 2016 revenue estimate to $18.39 billion from $18.44 billion.
"Average selling prices can be supported for the near term from trailing contract prices, but we expect lower prices into Q4E on our view that lower global prices ultimately pressure a lofty U.S. premium lower," Tanners added.
Tanners, however, maintained the stock's price objective of $56. At time of writing, Nucor shares were down 2.62 percent on the day, trading at $54.25.
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