Nucor (NUE) reported better-than-expected Q4 2021 earnings in the past week. Net sales of $10.36 billion (flat QoQ) slightly missed estimates of $10.446 billion, but record earnings per share of $7.97 (up from $7.28 in 3Q21) was above management's preannouncement range of $7.65 to $7.75 and higher than estimates of $7.91.

Nucor wrapped up the safest and most profitable year in company's history by generating a whopping $2.610 billion in cash from operations in the quarter. Nucor's impressive cash performance has enabled it to return significant amounts of cash back to shareholders via dividends and buybacks. In fact, Nucor bought back so much stock in 2021 that they reduced the share count by more than 11%.

Expect more buybacks

In the fourth quarter alone, Nucor stepped up its buyback activity, repurchasing 13.5 million shares at an average price of $111.63. That average price obviously is higher than where NUE shares are currently trading at, but management made it clear on the conference call that they think the stock is too cheap right here. "Our analysis suggests that Nucor's shares are significantly undervalued relative to our risk profile earnings and cash flow generation capacity," CFO James Frias said on the call. This indicates management will be very aggressive with its buyback in the first quarter. As of December 31st, 2021, Nucor has approximately $3.8 billion remaining available for repurchases under its current program. 

Outlook

As for the outlook, the company said it is confident that 2022 will be another year of strong profitability. This is a key statement because there is some controversy over what Nucor will earn this year. According to FactSet, 13 analysts have Nucor's estimated EPS for the financial year ending in December 2022 averaging $18.1/share. The lowest estimate is $12.0/share, and the highest estimate is $25.22/share. Bears think earnings fall significantly as new supply causes the price of steel to drop, but the bulls believe estimates are too low.

If you take a look at some of the biggest demand drivers in steel, we have to side with the bulls. Demands in nonresidential construction has not slowed, the easing of the chip shortage should lead to a strong recovery in auto production, new investments in the oil and gas industry are overdue, and we have still not seen the full benefits of already-passed and highly-potentially upcoming infrastructure investments. Overall, we are believers that the current steel cycle will be a multi-year story and not fall off a cliff like many think it will.

For the first quarter of 2022, management expects net earnings will be "slightly reduced" from the record results released this morning. The current consensus first-quarter 2022 earnings estimate on FactSet is $7.02, so that is about in line with what analysts are expecting. 

Factoring into this guide is an expected decline in steel mill segment earnings due to decreased profitability at sheet mills. Steel products are expected to achieve further margin expansion and profitability though, as Nucor's backlog pricing has improved and reflects higher steel costs.

The raw materials segment is expected to see earnings improve slightly sequentially due to improved profitability at direct reduced iron facilities, partially offset by the impact of lower scrap prices. Also, a lower-weighted-average share count (a result of the buyback) will provide a positive benefit as well.

Our take

It was a strong quarter for Nucor that capped off a record year. With steel demand expected to rise year over year, and Nucor expected to generate and return to shareholders several more billions in cash, we continue to believe this dirt-cheap stock—trading at roughly 5.5x consensus 2022 earnings estimates—has not gotten the respect it is due.