Headquartered in Charlotte, North Carolina, Nucor Corporation (NUE) is the largest producer of structural steel, steel bars, steel joists, steel deck and cold finished bars in the U.S. The company has 58 operating facilities, primarily in the U.S. and Canada. Through its network of “mini-mills,” the company produces steel sheets, bars, plates as well as various structural and other products.
Over the years, the company has grown through acquisitions as well as by tapping new markets and expanding geographically. It is aiming aggressively at utilizing cash 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. The Harris acquisition alone has increased Nucor’s rebar fabrication capacity to over 1.5 million tons.
However, Nucor is suffering from higher costs in scrap prices and continued weakness in the non-residential market. Overcapacity in the global steel industry has forced steel manufacturers to export steel and steel products at prices below their cost of production, impacting profitability.
A slowdown in steel demand from the automobile sector and an increased Chinese production are matters of concern. Chinese steel output has outpaced demand in the country, causing an excess supplies and higher inventories.
Nucor’s steel mill utilization rate is low. The utilization rate decreased from 80% in 2008 to 54% in 2009. This resulted in an increase in total energy costs of about $1 per ton in 2009 compared with 2008. Although the utilization rate increased to 73% in the first quarter of 2010, it still remains low compared with peers. The near-term headwinds in the end-markets are likely to make it difficult for the stock to outperform.
However, long-term contracts, cost reduction efforts and a dominant acquisition strategy could be positives in the company’s performance in the coming quarters. We are optimistic about Nucor’s recent joint venture with Mitsui, which would help Nucor grow internationally. Besides, Nucor’s strong balance sheet positions the company well for the long term.
As such, we upgrade Nucor to Neutral from our pervious Underperform recommendation.
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