Steelmaker Nucor Corporation (NUE) is feeling the heat of oversupply in the U.S. Steel market and the gloomy European market. Nucor now projects earnings of 35 to 40 cents per share in the second quarter, way behind the 94 cents it posted in the same period last year and below the 46 cents posted in the first quarter this year.

However, the projected earnings include one-time adjustments such as an impairment charge of approximately $30 million, or 9 cents per share, and an estimated last in first out (LIFO) credit of $14.5 million (3 cents per share). Even after excluding these items, estimated adjusted earnings for the second quarter, at its mid-point, would be below first quarter results.

Nucor was already reeling under the effects of a weak steel market in Europe and the situation degenerated as the political situation took a turn for the worse. Utilization rates at Duferdofin Nucor continued to be depressed, falling well behind budgeted levels through the first half of the year. As a result, the company reassessed Duferdofin Nucor and decided it called for impairment.

In addition, an increase in imports in the U.S. markets along with production ramp ups by domestic steel producers led to an oversupply in the industry, resulting in weak pricing. Hence, even though steel demand exhibited improvement, industry oversupply knocked the wind out of seasonal pricing momentum, which is usually seen in the early part of the year.

Also, lower scrap pricing is affecting the operating performance of Nucor’s scrap processing business. But, the company believes that the drop in scrap prices will result in a better operating performance by steel mills as the lower prices will move down to the cost of scrap used by them.

However, the company also said that all three of its construction products businesses, rebar fabrication, joist and decking, and pre-engineered metal buildings were in the black in May, in spite of the sluggish construction market. The positive results of the construction business were driven by Nucor’s efforts of moving lower on the cost curve and improving its position in the market. Like last time, heavy equipment, energy and automotive end-markets continued to perform strongly.

Nucor has beaten the Zacks Consensus Estimate for the last four quarters, with an average positive surprise of 17.6%. However, with the economic uncertainty in Europe and oversupply in the industry pressurizing prices, Nucor’s streak runs the risk of getting snapped in the second quarter.

We currently have a long-term (more than 6 months) Neutral recommendation on Nucor. The company, which competes with U.S. Steel Corp. (X) and Commercial Metals Co. (CMC), currently holds a Zacks #5 Rank, reflecting a short-term (1 to 3 months) Strong Sell rating.

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