Shares of Nucor Corporation (NUE), the largest recycler of steel scrap in the US, fell 3.07% or $1.25 and closed at $39.41 on September 14, 2010 after projecting a weak third quarter 2010 guidance. Nucor stated that the ongoing slowdown across its product lines, especially in the flat rolled business in the backdrop of an economic uncertainty would get reflected in the third quarter results. Residential and non-residential construction markets remain challenging for Nucor's downstream businesses. Nucor is also likely to record huge inventory charges.
The steel maker projects third quarter 2010 earnings within $0.05 to $0.10 per share significantly down from 29 cents and 10 cents in the second quarter and first quarter of 2010, respectively. The company attributed weak margins to higher scrap costs and the inability to transfer these price increases to customers.
However, earnings are expected to reverse year-ago losses of 10 cents per share. When adjusted for inventory charges, the company expects third quarter earnings to beat first quarter income but remain behind the second quarter. The projected third quarter earnings are substantially below the Zacks Consensus Estimate of 31 cents with a downside potential of 9.68%. Historically, Nucor has outperformed the Zacks Consensus Estimate as reflected by the average surprise of 54.47%.
Steel scrap prices have been surging driven by increased production in China and other emerging economies. The ongoing economic slowdown has marred prospects in the housing and construction sectors in the near term. All these taken together make situations gloomy for Nucor. However, long-term contracts, cost reduction efforts and a dominant acquisition strategy could benefit the company in the coming quarters. We are optimistic on Nucor's growing presence in the international market. In addition, Nucor's strong balance sheet provides with long-term security, but the near-term headwinds in the end-markets are likely to stifle the stock's growth.
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. As such, there is a bleak overall near-term price outlook.
Analysts and investors are negative on Nucor in the near-term, which is reflected in the short-term (1 to 3 months) Zacks #4 Rank (“Sell”). For longer-term (6+ months), Nucor has a Neutral recommendation.NUCOR CORP (NUE): Free Stock Analysis Report
Zacks Investment Research
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