Nucor (NUE) reported third quarter earnings before the opening bell Thursday.

Net sales of $10.31 billion (+17% QoQ) was roughly in line with estimates, however record earnings per share of $7.28 (up from $5.04 in 2Q21) came in below management’s preannouncement range of $7.30 to $7.40.

It’s a surprise to see a company pre-announce to the upside and then report a number slightly short of their range.  Reporters reached out to management to help understand the disconnect, they pointed out the intercompany profit eliminations from the downstream business were more than expected, resulting in a non-cash miss. Nucor didn’t miss guidance because of shipments. It was simply a function of their vertical integration. This miss on earnings explains why shares were down hard in today’s session. Instead of focusing on a difference of a few pennies per share, we think investors should turn their attention to operating cash flow numbers because that’s a better tell of the story.

It's a cash flow story

Here, Nucor delivered its strongest performance in company history, with operating cash flow of $3.62 billion crushing estimates of around $2 billion. On top of record levels of cash flow, Nucor also continues to repurchase stock at a steady pace. The company bought back approximately 8.2 million shares during the quarter at an average price of $104.60, compared to 6.8 million shares at an average price of $90.80 in the second quarter. As of October 2nd, the company had $1.9 billion remaining under its newly authorized program.

But not all of the company’s cash flow is returning to shareholders. Over the past few months, Nucor has announced and completed several acquisitions aimed at increasing capability and share in fast-growing markets. Nucor also recently announced plans to build a new $2.7 billion state-of-the-art steel mill. 

As for the fourth quarter, Nucor said they expect net earnings will "potentially" exceed the record set in the third quarter. Current fourth-quarter earnings estimates per FactSet call for flat earnings quarter to quarter, so we think management’s commentary leans neutral to positive relative to expectations.

Nucor also said it expects demand to remain “robust” across most end-use markets well into 2022. With demand expected to stay strong for the foreseeable future, new supply and its impact on prices will be the main thing to monitor.

We would be buyers of Nucor after this weakness for a few reasons: 

• First off, we continue to believe steel prices will be far more resilient than what the market is expecting thanks to auto manufacturing bouncing back and new investments in oil and renewable energy. Additionally, the company has pointed out that customer inventories are still “relatively lean” and the order backlog at most of the businesses means strength should continue next year.

• Second, capital return to shareholders. The company continues to repurchase stock, sometimes even at higher levels, and we interpret that as management's confidence in the future; companies would not buy back its shares if they don't know they will make a lot of money in the years ahead.

• Lastly, we remain hopeful that an infrastructure bill will be passed. It’s going to take a lot of steel to complete the projects Congress plans on funding, representing one more positive demand driver for 2022 and in future years. This news helped the stock go up from 100 -> 125 in the summer, but since then has given back all of those gains, effectively de-risking this news. We're essentially buying the potentials of the infrastructure bill for free here.

Nucor is a terrific choice for investors who are looking for a stock to buy if and when an infrastructure bill is ready to be passed.