Recently, credit ratings agency Moody’s Investors Service (MCO) has cut Nucor Corporation’s (NUE) unsecured debt rating one notch to “A2″ from “A1″ and affirmed the steel maker’s Prime-1 short-term debt rating. Moody’s judges obligations rated “A” as “upper-medium grade”, subject to “low credit risk”, but are susceptible to impairment over the long term. The agency judges Prime-1 rated issuers as having a superior ability to repay short-term debt obligations. The unsecured debt rating remains investment grade.
Moody’s stated that the downgrade reflects Nucor’s weaker earnings in the last quarter of 2009. Nucor slumped to losses again in the fourth quarter of 2009. Net earnings in the quarter tumbled 44% to $58.9 million or 18 cents per share on lower demand for construction products. In 2009, net sales plummeted 53% to $11.19 billion. Average sales price per ton decreased 32% while total tons shipped to outside customers decreased 30% from 2008. Steel mill utilization rates decreased from 80% in 2008 to 54% in 2009.
Moody’s stated that although Nucor continues to have a strong liquidity, with $2.2 billion in cash and short-term investments as of the end of last year, it does not expect any significant improvement in the company’s profitability, going forward. The ratings agency expects Nucor’s performance to continue reflecting a weak demand for steel, especially in non-residential construction markets.
Nucor, the nation’s largest recycler of steel scrap, is suffering from continued low operating rates and high-cost pig iron inventories. Moreover, a slowdown in demand from the automobile sector and increased production in China are matters of concern. We believe 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.
We have an Underperform recommendation on Nucor.
Read the full analyst report on “NUE”
Read the full analyst report on “MCO”
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