Nucor Fundamental Analysis
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Nucor
Last Updated: 28 Oct 2023
NYSE: NUE
GICS Sector: Basic Materials
Sub-Industry: Steel
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Table of Contents
You can download a summary of Nucor's fundamental analysis in PDF here.
Management
CEO: Leon Topalian
Tenure: 4.1 years
Nucor Corporation's management team has an average tenure of 2.8 years. It is considered experienced.
Source of Revenue
Nucor Corporation manufactures and sells steel and steel products. It is also North America’s largest recycler, using scrap steel as the primary raw material in producing steel and steel products.
The company has three reportable segments: Steel Mills, Steel Products and Raw Materials
Steel Mills
This segment produces hot-rolled, cold-rolled, and galvanised sheet steel products; plate steel products; wide-flange beams, beam blanks, and H-piling and sheet piling products; and bar steel products, such as blooms, billets, concrete reinforcing and merchant bars, and special bar quality products.
It also engages in steel trading and rebar distribution businesses.
The steel mills segment sells its products primarily to steel service centres, fabricators and manufacturers located throughout the United States, Canada, and Mexico.
Steel Products
The Steel Products segment offers hollow structural section steel tubing products, electrical conduits, steel racking, steel joists and joist girders, steel decks, fabricated concrete reinforcing steel products, cold finished steel products, steel fasteners, metal building systems, insulated metal panels, steel grating and expanded metal products, and wire and wire mesh products.
This segment also includes the piling distribution business.
These products are sold primarily for use in non-residential construction applications.
Raw Materials
This segment produces direct reduced iron (DRI); brokers ferrous and nonferrous metals, pig iron, hot briquetted iron (HBI) and DRI; supplies ferroalloys; and processes ferrous and nonferrous scrap metal. The raw materials segment also includes our natural gas drilling operations.
Nucor’s raw materials investments are focused on creating an advantage for its steelmaking operations, through a global information network and a multi-pronged and flexible approach to metallics supply.
Nucor markets products from the steel mills and steel products segments mainly through in-house sales forces. The company also utilises internal distribution and trading companies to market products abroad.
The company has a diverse customer base and is not dependent on any single customer. In 2022, the largest single customer represented approximately 5% of sales and consistently pays within terms.
Nucor Reportable Segment Revenue FY2022
Nucor Economic Moat
Nucor Economic Moat
Economic Moat: None
There are many ways to identify Nucor’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Nucor. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Nucor’s revenue growing YoY for the past 5 years consistently? Inconsistent.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Yes.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? Inconsistent.
Nucor Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Yes.
Nucor FCF per Share
Management Effectiveness
Is Nucor’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Nucor Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? No.
Nucor Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
Nucor Shares Outstanding (Million Shares)
Nucor Financial Health
Nucor Financial Health (USD Million)
Current Ratio: 3.7 (pass my requirement of >1.0)
Debt-to-EBITDA: 0.8 (pass my requirement of <3.0)
Interest Coverage: 38.1 (pass my requirement of >3.0)
Debt Servicing Ratio: 0% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 1.4%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
Nucor’s dividend payments are reasonably covered by its earnings and cash flows.
Nucor Intrinsic Valuation
Estimated intrinsic value: $228.88
Value is calculated using the discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$5,400M
Projected growth rate: 3% - 4%
Beta: 1.7
Discount rate: 11.5%
Margin of safety: 40% (Uncertainty: High)
Price range after the margin of safety: <$137.00
Date of calculation: 28 Oct 2023
Nucor Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Nucor Intrinsic Valuation
Nucor Relative Valuation
Nucor EV-to-EBITDA vs its peers
Nucor Price-Earnings Ratio vs its peers
Nucor Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Global steel production overcapacity continues to be an ongoing risk to Nucor and the entire steel industry.
China continues to be a significant contributor to excess steelmaking capacity, producing more than one billion tons of steel in each of the past two years.
During periods of global economic weakness, this overcapacity is amplified because of weaker global demand for steel and steel products. This excess capacity often results in manufacturers in certain countries exporting significant amounts of steel and steel products at prices that are at or below their costs of production.
In some countries, the steel industry is subsidised or owned in whole or in part by the government, giving imported steel from those countries certain cost advantages.
These imports, which are also affected by demand in the domestic market, international currency conversion rates, and domestic and international government actions, can result in downward pressure on steel prices, which may affect Nucor’s business.
Another concern is environmental regulation compliance and remediation, which may result in increased costs and affect the business.
Summary for Nucor
As with most commodity or basic material producers, it is difficult to build an economic moat.
There is almost no network effect and has a low switching cost. Although the most common switching costs are monetary, there are also psychological, effort-based, and time-based switching costs. Using this framework, customers will not incur any psychological or much effort and time to switch from one steel producer to another.
Henceforth, the two areas where Nucor can build its moat are cost advantage and intangible assets.
An example of cost advantage is Nucor’s raw material supply chain. The company’s investment in direct reduced iron production facilities, scrap brokerage and processing businesses provide Nucor with significant flexibility in optimising its raw materials costs.
In addition, having a significant portion of the raw materials supply under Nucor control reduces the risk associated with the global sourcing of raw materials, particularly since a sizable portion of scrap substitutes comes from regions of the world that historically have experienced greater political turmoil.
Nucor has an interesting compensation system. Its incentive-based pay system reduces payroll costs, both hourly and salary, which helps to offset lower selling prices.
The pay-for-performance system that is closely tied to the levels of production also allows Nucor to keep their experienced workforce intact and to continue operating facilities. As compared to some of its competitors, they have greater fixed costs and are forced to shut down some of its facilities.
Besides its compensation system, Nucor uses electric arc furnaces to produce steel. This allows the company to easily vary the production levels to match short-term changes in demand, unlike the blast furnace-based integrated competitors.
This highly variable low-cost structure allows Nucor to successfully navigate cyclical, severely depressed steel industry market conditions.
As cost advantage is the only strongest moat that Nucor has achieved, overall, the company does not have any economic moat.
Over the past five years, Nucor's performance has shown a mix of trends. While its revenue growth year over year has been inconsistent, the company has demonstrated stability in other key areas.
The net income has experienced fluctuations rather than a consistent upward trajectory. However, there is a positive note in the consistent growth of cash flow from operating activities, indicating strong financial health.
Furthermore, Nucor has maintained a positive free cash flow throughout this period. The gross margin percentage has exhibited growth over the past five years, showcasing the company's effective cost management.
Additionally, the free cash flow per share has seen a steady increase, reflecting Nucor's ability to generate value for its shareholders.
Nucor's approach to capital allocation over the past five years has shown a degree of variability. The ROE has not maintained a consistent range of 12% to 15% year over year. However, it's worth noting that Nucor's ROE consistently outperforms the industry average.
Similarly, the ROIC has experienced fluctuations rather than a steady 12% to 15% range annually. Nevertheless, Nucor's ROIC consistently surpasses its WACC, suggesting that the company generates returns in excess of its cost of capital.
A positive trend is observed in the declining number of shares outstanding, which is an encouraging sign for investors. This indicates a potential reduction in dilution of ownership, a factor that can be attractive for those holding Nucor shares.
Nucor demonstrates a robust financial health across various key indicators. With a current ratio of 3.7, the company comfortably exceeds the standard requirement of a ratio above 1.0, indicating its strong ability to cover short-term liabilities.
The debt-to-EBITDA ratio stands impressively at 0.8, well below the threshold of 3.0, showcasing Nucor's prudent management of debt in relation to its earnings. Moreover, the interest coverage ratio of 38.1 indicates a healthy capacity to cover interest expenses.
Additionally, Nucor boasts a debt servicing ratio of 0%, which comfortably falls below the 30% benchmark, highlighting the company's ability to efficiently manage debt payments relative to its income.
Investing in Nucor warrants careful consideration. The company lacks a discernible economic moat, suggesting it may face challenges in maintaining a competitive edge in its industry. Nucor's performance and capital allocation have shown unsatisfactory traits, which could potentially impact returns for investors.
On a positive note, the company maintains a stable balance sheet, providing a degree of financial security.
It's important to note that investing in Nucor carries a notable level of uncertainty. Given these factors, a prudent approach would be to seek a high margin of safety, perhaps around 40%, to account for the potential risks and uncertainties associated with this investment. This would provide a buffer against unforeseen challenges and enhance the likelihood of achieving satisfactory returns over the long term.
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