Nucor (NUE) provided its mid-quarter update earlier this morning and guided to third-quarter earnings well above consensus estimates. In the press release here, the company said it expects third-quarter earnings in the range of $7.30 to $7.40 per share, which is well above the consensus estimate of $6.60. Nucor's third-quarter guidance range also represents significant growth over the $5.04 record set in the second quarter.

Nucor said all three operating segments continue to generate robust profitability as overall demand remains strong across most end-use markets. Steel mill earnings are expected to significantly increase quarter over quarter, mainly due to higher prices. Margins within the steel products segment are expanding thanks to higher average prices. And the raw materials segment is expected to post similar results to the second quarter, excluding an impairment charge recorded in the second quarter.

In addition, Nucor said it repurchased 6.7 million shares in the quarter at an average price of $105.58 per share. In total, Nucor has returned nearly $2 billion to stockholders via dividends and buybacks, and we believe this trend of significant capital returns can continue. Here is the reason why: Nucor's balance sheet is already pristine, so they do not have to pay down debt, and capital spending is expected to fade in 2023. This all allows for a large chunk of that earnings power and robust free cash flow generation to return to shareholders.

Looking ahead, Nucor said its internal business units' forecasts suggest that its fourth-quarter 2021 results "are likely to continue the trend of exceptional performance we have seen so far this year." It's hard to tell by this language if the fourth quarter will be another record, but what's for certain is that Nucor's earning power isn't going away anytime soon. Because of this and the fact that the price of steel has remained incredibly resilient at its highs, we think there is upside to the current fourth-quarter consensus EPS estimate of $6.21.

So why is the stock down today?

We have an angry market right now, and the seasonally weak period is playing out despite the better-than-expected August retail sales report. And despite Nucor's consistent beat and raise, beat and raise cadence this year, there is always the concern that things are as good as it gets for the steelmakers. Right now Nucor is trading at 4 times earnings, which is a historically low multiple reflecting the view that steel cycle is ending this year. This is against our view, as we've said multiple times that once the steel supercycle gets running, it tends to last for multiple years. Analysts expect Nucor's earnings to be around 22$ per share this year, but forecasting 11$ per share next year. What is the factor that cuts its earnings in half? Where is the recession? We don't see any recession, we see continued strong demand for steel as economic activities continue to stay strong. This price level is also not at all reflecting the massive infrastructure bill that has not been passed yet, which will be humongous for steel demands. So demand continues to stay strong, and supply continues to be constrained because of continued disruptions in the supply chain for steel around the world (delayed production, disrupted transport). As a result, prices are not going to come down. There are news of other American steel companies building/opening more steel mills, which has also been hurting Nucor's stock. However, news of opening steel mills today will not resolve the shortage next year. Look at the chip shortage situation, how's that resolving so far?   

When Nucor's forward earnings estimates are upwardly revised yet the stock price is trading lower, it means this is the opportunity to buy. We used recent weakness to initiate ownership of the stock again. We've been trading in and out of Nucor for this would be the third time now, having succeeded the previous 2 times. We've written in our analysis before, once the steel cycle gets going it is a supercycle, lasting for many years. Nucor has a tendency to run up a lot during a short amount of time, consolidate/sell off, and then run up again. We're buying some here, and would be more than happy to buy again if the stock comes down to the 90s.