About Nucor

Nucor is the largest steel producer in the United States, primarily serving commercial, municipal construction and industrial markets. The company operates in three major segments: steel mills, steel products and raw materials. Nucor is also the largest metals recycler in North America.

The steel mills segment produces and distributes a range of products including sheet steel, plate steel, structural steel and bar steel. The steel products division manufactures a range of products including steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems and wire/wire mesh. The raw materials group processes and brokers ferrous and non-ferrous metals as well as producing direct-reduced iron and natural gas.

The steel industry has been a focus of investors since the election as President Biden's expected infrastructure spending policies are likely to infuse growth for the country's major operators. Additionally, steel producers have enjoyed an incredible pricing environment this year because the surge in demand coming out of the pandemic, combined with the easily absorbed capacity growth has created a very tight environment. Not only has this pushed commodity prices higher, but it has also sent Nucor's earnings soaring.

We also think a very shareholder friendly capital return story is about to pick up here. Nucor offers a solid 1.52% dividend yield and that's just okay, but if you know the company well then you know they have a history of returning a lot of capital to shareholders when times are good. And it is a great time to be a steelmaker. Shareholders got a taste of this earlier this year when the company announced its Board approved a new share repurchase program worth up to $3 billion. But according to analysts at BMO Capital Markets, this was likely the first of many "significant" capital returns from the group. "Within the context of our ongoing higher-for-longer view towards underlying prices, the U.S. steel produces are poised to generate record-high results and free cash flow," BMO wrote. "With well-defined capital spending programs and meaningfully improve balance sheets, in our view much of this cash generation has the potential to be returned to shareholders via buybacks and/or special dividends."

In addition to capital returns, bolt-on acquisitions are another way management can strategically use cash. Early June, Nucor announced it will acquire Cornerstone Building Brands' insulated metal panels (IMP) business for a cash purchase price of $1 billion. Nucor paid a steep price for this business at roughly 10x pre-pandemic EBITDA, and the cash spent on this deal means less will be available to be returned to shareholders. However, the strategic benefits are clear, with demand for IMP products expected to grow at a double-digit annual growth rate through this decade, "driven by evolving consumer preferences regarding e-commerce and grocery delivery, as well as the expansion of data centers and server farms which all require temperature-controlled climates," according to Nucor.

We are initiating the position in the low $100 with a $120 price target, reflecting slightly less than 6x EV/EBITDA multiple on consensus 2021 estimates. That being said, we think the EBITDA estimates are too low and don't fully reflect the pricing gains Nucor has experienced this year.

Clearly, we are not early to the Nucor party here with the stock around at a double year-to-date. If you pay attention to our action, we got into the stock early in April and exited in mid May with a whopping 30% gain. We see recent stock weakness as long-term buying opportunities because historically when the Steelcos get going, we tend to see a multiyear move. That's why we think the run here is not over.

October 2021: Lately, we've been hearing downgrades from analysts regarding Nucor and steel prices (see latest example here). We understand how the analysts are trying to get ahead of what they think will be a correction in steel prices, however, we see several reasons why prices could remain resilient. Instead of focusing too heavily on what could go wrong with the price of steel, let’s take a look at what can go right on the demand side and cause prices to remain higher for longer.

First, the auto industry is a huge end market for Nucor. Even though all the major automakers are going through production delays due to the chip shortage, demand for new cars remains strong and we should see steel consumption pick up once the automakers secure the chips. What happens to the demand for steel after the chip shortage eases hopefully in 2022 and auto production rates greatly increase to meet the demand?

How about energy? Demand for steel in this industry has been weak, but with WTI crude firmly above $70 per barrel, we could see the need for more steel tubes and fittings in oil and gas rigs, as well as more pipelines. In renewables, offshore wind farms require a huge amount of steel to be produced. And we would not sell Nucor ahead of the potential passing of a comprehensive infrastructure package which should boost demand over the next several years.

Lastly, let’s not forget about the capital return story here. Management is committed to returning at least 40% of earnings back to shareholders. Nucor is currently delivering record levels of profitability, and that cash is coming back to shareholders through a huge share repurchase program. Even Goldman Sachs pointed out that Nucor screens most attractive on a capital returns yield (dividend yield plus share repurchase yield) relative to peers.