Down But Not Out
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In Nordic mythology, Thor, the God of Thunder, is often portrayed with his steel hammer, unleashing his fury upon those who dare challenge his rule or threaten his domain in Asgard .
Surely, shareholders in steel and iron stocks and exchange traded funds must be feeling that way with the performance of the sector. Declining economic growth around the world, particularly in China, has punished the steel industry, and its shareholders. Over the last 52 weeks of market action, Market Vectors Steel (NYSEMKT: SLX), the exchange traded fund for the steel industry has fallen by 34.25%. Steel and iron market leaders such as ArcelorMittal (NYSE: MT) and Nucor Steel (NYSE: NUE) are down, too.
While ArcelorMittal is the largest steel company in the world, Nucor Corporation is considered to be one of the best managed with very lean operations. For the last year, Nucor Corporation,the largest steel maker in the United States, is down 4.51%. Year to date, it's off by 2.52%. ArcelorMittal, by contrast, is down 13.43% for 2012; and 53.74% for the previous 12 months.
Nucor Corporation has much to offer for income, growth and value investors looking for a dividend paying stock in the steel and iron sector.
For dividend income, Nucor Corporation has a 3.86% yield. That is about twice the yield for the average company on the Standard & Poor's 500 Index. Legendary investor John Neff, the founder of the Vanguard Group and creator of the first index mutual fund, notes in his book "Enough" that dividend income has provided more than 40% of the historic total return for an equity. Nucor's above average yield constructs a strong income foundation to buffer an investment portfolio. The payout ratio for Nucor Corporation is around 60%, slightly above the historic average for a dividend paying stock, but easily sustainable. It also provides for the possibility of dividend growth in the future.
The growth being registered by Nucor Corporation readily supports the dividend income; and should please investors looking for this feature. Earnings-per-share growth for Nucor Corporation this year is over 485%. Obviously growth like that will never last. However, earnings-per-share growth for next year is projected to be 71.08%. By contrast, earnings-per-share growth is down 44.86% for Arcelor Mittal this year.
Value investors will like the price-to-sales ratio of just 0.59. In addition, the price-to-earnings ratio is 15.78. That is predicted to improve to 10.85 for the next year, showing the value in the present share price level of the stock.
As an American steel company, Nucor Corporation, headquartered in Charlotte, North Carolina, has higher labor and regulatory costs than ArcelorMittal, which operates in many emerging market countries from its base in Luxembourg. But the profit margin for Nucor Corporation of 4.16% is higher than that of ArcelorMittal at 1.26%. Nucor's return-on-equity (ROE) of 10.26% is also better than the 2.03% ROE being posted by ArcelorMittal. For a company the size of Nucor Corporation, that is one of the best in the sector and a very impressive ROE as the steel industry is clearly in a downturn with competition very tough in the sector.
Nucor is positioning itself to expand when the steel industry recovers. It recently completed its $605 million acquisition of Skyline Steel LLC from, ironically enough, ArcelorMittal. Nucor fully expects the acquisition to result in higher profits commencing with the first fiscal year of ownership. Skyline specializes in steel used in projects such as highways, bridges and underground parking garages which will mesh well with Nucor's production of structural bars, steel plates and recycled scrap.
The Skline Steel LLC deal is being viewed positively by the analyst community as Nucor Corporation was just upgraded on March 19, 2012 by UBS from Neutral to a Buy. Now trading around $38.90, the mean analyst target price for Nucor Corporation over the next year is $45.50.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services recommend Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.