Nucor Corporation (NUE) provided its first quarter 2010 earnings update, indicating it expected earnings per share to be in the range of a loss of 5 cents to earnings of 5 cents per share. The Zacks Consensus Estimate is pegged at net earnings of 2 cents in the first quarter. Nucor had reported a loss of 60 cents in the first quarter of 2008.
Nucor’s guidance is driven by higher expected operating rates at its beam and bar mills. The company is anticipating operating rates of 55% and 63% at its beam and bar mills, respectively, in the first quarter, up from 11% and 10% in the previous quarter. Nucor also foresees 85% and 90% utilization at its sheet and plate mills, up 22% each from prior quarter levels.
With improved utilization rates, Nucor expects production to climb 51% in the first quarter. Shipments are expected to be up 49%. The company’s scrap business under the Raw Material segment also showed significant improvement in the last reported quarter.
However, Nucor continues to see weakness in the residential and non-residential construction markets, with little sign of strength.
Recommendation Upgrade
We are upgrading Nucor from Underperform to Neutral. With operating rates up near peak levels on the beam product side and bar product operating rates also creeping higher, we believe that Nucor is well positioned to benefit from the ongoing recovery in steel fundamentals.
However, we remain wary of the company’s high long products exposure relative to others in the sector, including United States Steel Corporation (X), ArcelorMittal (MT) and Commercial Metals Company (CMC). We think it could be challenging for Nucor and other long products players to push through scrap surcharges on long products as end demand remains weak. The company’s relatively high construction exposure and lower leverage to improving steel prices is also a concern.
Nonetheless, we believe Nucor is well positioned with a good pipeline of organic investments and a very strong liquidity position.
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