Neutral on Nucor Corp. - Analyst Blog

We reiterate our Neutral recommendation on Nucor Corporation (NUE). Nucor Corporation, the nation’s largest recycler of steel scrap, is facing higher costs in scrap and scrap substitute prices, which is the most significant elements in the total cost of steel production.

Lower production rates at the mills have slowed the rate at which they consume the higher cost iron units, in particular pig iron inventories. However, pig iron consumption had increased midway through 2009. Moreover, a slowdown in demand from the housing and construction sector and increased production in China are matters of concern.

However, long-term contracts, cost-reduction efforts and a dominant acquisition strategy could benefit the company in the coming quarters. Nucor’s focus has been on profitable growth through acquisitions over the past several years. It is aiming at utilizing cash aggressively for accretive acquisitions.

The annual capacity of Nucor’s downstream value-added products has more than doubled since late 2006 to over 4.5 million tons with the acquisitions of Verco Manufacturing Company in steel decking; Harris Steel Group Inc. in rebar fabrication, cold finished bars and metal grating; LMP Steel & Wire Company in cold finished bars; Magnatrax Corporation in metal buildings; and Nelson Steel Inc. in wire mesh. Harris alone has increased Nucor’s rebar fabrication capacity to over 1.5 million tons.

We are also positive on Nucor’s recent joint venture with Mitsui, which would help Nucor grow internationally. In addition, Nucor’s strong balance sheet positions the company well for the long term, but the near-term headwinds in the end-markets are likely to make it difficult for the stock to outperform.

Although end-markets are stabilizing, average selling prices are still struggling as the pace of recovery in the U.S. and global markets is quite slow. Additionally, massive industry over-capacity continues to weigh on steel prices. The ongoing slowdown has marred prospects in the housing and construction sectors in the near term. As such, there is a bleak overall near-term price outlook.

Currently, shares of Nucor Corporation are trading at 35.5x our 2010 EPS estimate, compared with the 22.4x for the peer group and 13.6x for the S&P 500. Over the last five years, Nucor’s shares have traded in a range of 5.2x to 81.5x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it would perform in line with the market. Our $41.00 target price, 37.6x 2010 EPS, reflects this view.
 
NUCOR CORP (NUE): Free Stock Analysis Report
 
Zacks Investment Research