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Nucor to Gain from Auto Strength, But Challenges Remain

On Mar 4, 2016, we issued an updated research report on steel giant Nucor Corporation NUE.

Nucor slipped into a loss in fourth-quarter 2015, hurt by hefty impairment charges and lower selling prices. Adjusted earnings, however, topped the Zacks Consensus Estimate. Revenues tumbled year over year on lower pricing and shipments, and missed expectations.

The company expects modest improvement in its Steel Mills and Raw Materials units in the first quarter while performance in its Downstream Products segment is expected to be weak in the quarter. Market conditions in the Raw Materials business are expected to continue to be challenging due to depressed raw materials pricing.

Challenging steel market fundamentals continue to weigh on Nucor’s prospects. The steel industry is still going through a difficult phase and market conditions remain challenging in the U.S. Nucor, like other steel makers, remains plagued by high-levels of domestic steel imports.

Despite some favorable developments on the import front in the recent past, the U.S. steel industry still remains under the risk of cheaper imports in the face of a stronger dollar. Notwithstanding the U.S. steel industry’s low capacity utilization, imports continue to flow into the domestic market due to foreign producers’ overcapacity. Imports and oversupply in the industry are pressurizing steel prices, thereby affecting margins of U.S. steel producers, including Nucor.

Finished steel imports captured a record 29% share of the U.S. market in 2015. High import levels are hurting the performance of Nucor’s steel mills unit.

Moreover, demand for steel is expected to remain subdued in energy markets in the near term given lower oil prices. While non-residential construction activities are improving, the market remains below its peak levels. Weakness also continues across heavy equipment and agricultural markets.

Nevertheless, Nucor continues to see strength in the automotive market. Demand from this key end-market (especially for the company’s sheet steel products) remains healthy, reflected by contract awards by automotive OEM customers. Nucor's shipping rate into the automotive market climbed roughly 20% year over year in 2015. The company remains focused on achieving greater penetration of this major market in 2016.

Nucor also remains committed to expand its higher margin product portfolios and improve its cost structure. Nucor’s Louisiana direct reduced iron ("DRI") facility, its largest project, came online in Dec 2013. The $750 million plant is expected to produce 2.5 million tons of DRI annually when the operations are in full swing.

In addition, sheet piling production capabilities expanded at Nucor-Yamato structural steel following the completion of a roughly $115 million expansion project. The Nucor-Yamato joint venture is expected to continue to grow its share in the steel pilings market over the next few years. The joint venture remains focused on broadening its value-added offerings.

Nucor is a Zacks Rank #3 (Hold) stock.
 
Stocks to Consider

Some better-ranked companies in the basic materials space include Norsk Hydro ASA NHYDY, Golden Minerals Company AUMN and Usinas Siderurgicas de Minas Gerais S.A. USNZY. While Norsk Hydro sports a Zacks Rank #1 (Strong Buy), both Golden Minerals and Usinas Siderurgicas carry a Zacks Rank #2 (Buy).

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