18% Upside on This Steel Stock
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Nucor (NYSE: NUE) is the largest steel producer in the U.S. It is also the largest recycler of any material in the North American region, recycling half a ton every second. Nucor’s annual steelmaking capacity stands at around 25 million tons.
Recently, Nucor released its earnings for the fourth quarter 2012. The company reported earnings per share of $0.43, beating the guidance range that was $0.25 to $0.30. In 2012, the cash flows from operations increased to $1.2 billion from $1 billion in 2011. As the company had a lot of cash in its system, it retired $650 million of long term debt in the latest quarter. As a result, Nucor’s total debt to capital ratio now stands at 31.7%. The capital spending in 2012 totaled $948 million, a large amount of which was invested in the growth projects. Moreover, $675 million was spent during the acquisition of Skyline Steel.
Cash, short-term investments, and restricted cash were $1.4 billion. Further, the company had no commercial paper outstanding till its fourth quarter. On January 16, Standard & Poors published a report entitled “U.S. Metals and Mining Companies, Strongest to Weakest” where Nucor stood number 1 for credit rating and outlook among 67 companies.
The company’s Arkansas steel mill started twin tank vacuum degasser in the latest quarter. Vacuum degasser removes hydrogen, nitrogen, and carbon from molten steel. This results in better electrical efficiency, more formability, and lesser susceptibility to cracking. The degasser is all set to expand the company’s value added products to several markets in the future.
Imports continued to present a serious challenge to the U.S. steel industry. According to U.S. Census Bureau data for December, full year imports stood at 26.7 million tons, depicting a 17% increase from 2011 and a 38% increase from 2010. Having said this, the U.S. steel industry increased its production capacity by only 10% during these two years. In short, these imports are still significantly hampering the local steel industry.
Currently, Nucor is trading at a forward P/E (1yr) of 11.89x, has a PEG of 2.30 and has a mean recommendation of 2.30 on the sell side. Using steel industry’s average forward P/E of 10.4x, we can value Nucor. However, as it is the market leader in the U.S. steel industry and is expected to remain there for some time, I would value Nucor by applying a premium of 5%.
According to high earnings estimates, Nucor should be trading around $55.15 that shows it’s undervalued by almost 18%. In short, it’s still one of the best buys in the steel industry.
In case of Steel Dynamics (NASDAQ: STLD), the scenario is somewhat different. With a forward P/E of 9.19x, it is relatively cheaper than the U.S. Steel. It is yielding a healthy dividend of 2.60% that is far greater than that of U.S. Steel. In contrast to U.S. Steel’s low growth, it has a strong growth rate of 17.43%. Plus, a mean recommendation of 2.5 on the sell side testifies the fact that it is a far better buy than U.S. Steel. Moreover, a PEGY of 0.78 depicts that it is an undervalued stock and has a significant upside potential. The bottom line is that I recommend buying Steel Dynamics at this stage.
U.S. Steel (NYSE: X) just reported a net loss of $50 million in its latest quarter. It is trading at a forward P/E (1yr) of 10.04x and has a PEG of 2.43. Moreover, its high PEGY of 2.20 shows that it is highly overvalued at this moment. Having said this, it has one of the lowest levels of growth in the steel industry. Further, a meager yield of 0.90% on its dividend and a mean recommendation of 2.9 on the sell side show its weak position. In short, I remain neutral on U.S Steel Corporation. You can have a look at my detailed take on U.S. Steel here.
The U.S. Steel industry has suffered a major hit from the economic downturn in the last few years. Moreover, high volumes of imports haven’t helped the cause either. Even under such tough economic conditions, Nucor’s international shipments were 10.4% of the total shipments in 2012. Nucor Corporation has not only minted some huge profits in the last few years, but it has also paid large sums of cash dividends to its shareholders. In December, 2012, the company increased its dividends for the 40th consecutive time. Moreover, over the last 12 years, its dividend has grown almost 10 times. Even in the economic downturn, the company showed a lot of resilience. Its strong cash flows are a testimony to its high liquidity, which in turn means that the company would continue to reward its shareholders with healthy dividends in the future as well. The bottom line is that Nucor has been the source of inspiration for the steel industry during the economic headwinds. As the U.S. economy gradually moves towards stability, Nucor is expected to perform even better in the years ahead. In short, buy Nucor for an upside of 18%.
Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!