At a time of depreciating crude prices due to which the oil sector companies are bleeding heavily and the tech stock displaying a dilly dally movement due to frequent change in consumer trends, finding a stable and valuable stock is difficult. In the face of stiff competition in the tech sector where almost every day a new launch is announced, this makes movement in the tech sector highly unpredictable. This is very much evident from the recent quarterly results where the performance of the tech sector as a whole is a mixed bag. In such a situation we need to rework our portfolio with the old school thought process to render stability and value to it. Steel is one such sector that can add some kind of stability to your portfolio though most of America believes that the steel industry is a history. Let us take a look at the current happenings in the steel sector.
The strength of real steel
Nucor Corp (NUE, Financial) has been able to make real good out of the ongoing American manufacturing renaissance and energy boom in a big way, being able to report some attractive financials and actually proving itself in the lines of a classic value stock in the process.
Like any other company, one thing that delights investors the most is its financial numbers on a high. In Nucor’s case the numbers alone are attractive enough to book a slot in any investment portfolio leaving aside the strong fundamentals of the company, so what are its numbers, let’s take a look at that:
- TTM revenue of $21.05 billion as reported on Sept. 30, 2014, a $2.39 billion rise from last September 2013 numbers of $18.61 billion.
- A gross quarterly profit margin of 10.52% for the third straight quarter of 2014.
- A quarterly profit margin standing at 4.3% for the third quarter of 2014.
- A dividend yield of 2.74%.
- A free cash flow of $371.78 million for the third quarter.
- A return on equity of 8.81% for the third quarter of 2014.
With such mouthwatering numbers being reported consistently, can we really afford to write off this sector from our portfolio? I doubt it. Furthermore, the lucrative financial numbers are complemented by the third quarter sales figures that Nucor reported on Oct. 23, 2014. The sales figures show that Nucor's market is growing, and its growth trend is here to stay for long and not fizz out in just a couple of quarters.
The highlights of Nucor's 2014 third quarter sales numbers worth taking cognizance are as follows:
- Nucor just reported a 15% increase in consolidated net sales over third quarter yoy.
- An 8% increase in consolidated net sales between second quarter 2014 and third quarter 2014.
Nucor reported consolidated net sales of $5.29 billion in second quarter 2014 and $5.70 billion in third quarter 2014 which clearly indicates that sector is on the run upward and picking up fast with $0.41 billion rise within quarters of the same fiscal year.
Steel costs fall while prices are on the rise
The steel sector and, for that matter, even Nucor stands to benefit from the fall in steel scrap prices while prices are on the upswing owing to rising demands. It reported that the average sales price per ton increased by 4% in the past year. Meanwhile, the cost of scrap steel, the major raw material for Nucor, fell by 1% between third quarter of 2013 and third quarter of 2014. A ton of scrap steel cost $384 in the third quarter of 2013 and dropped to $379 in the third quarter of 2014, which means a drop of $5 per ton which adds up to a considerable amount considering the scale of purchase that happens in this sector. Scrap prices have fallen majorly due to lower demand from overseas markets like Turkey.
Although Nucor's energy costs are increasing, total energy prices increased by $2 a ton in the first nine months of 2014. The cost was largely because of higher natural gas prices.
However in the next few months Nucor's energy costs should lower down, since the US Energy Information Agency (EIA) is predicting that the average price for an MMBtu (one million British Thermal Units) of natural gas at the Henry Hub in 2015 will be $3.84 compared to $4.45 in 2014. The EIA also stated that it expects natural gas prices to remain below $4 per MMBtu through November.
Hence it clearly signals brighter days ahead for Nucor as the production costs are on a southward motion even though the selling prices are on the rise, thus increasing profit margins for the steel honchos.
Nucor's business strategy
Nucor’s business strategy is paying off well since, unlike the common notion of steel makers targeting auto industry, Nucor has set its focus on oil and gas industry, railcar manufacturers and other infrastructure companies where the usage of steel is imminent and there cannot be any alternative to steel. Currently the automakers are moving away from steel towards lighter materials like aluminum and carbon fiber in order to substantially reduce weight and optimize fuel economy.
The demand for steel in the energy and rail sectors is on the rise. Nucor has expanded its footprint in the energy sector by purchasing Gallatin Steel Co. for $770 million which makes Nucor America's largest steel manufacturer. The price of plate steel used in oil and gas drilling rose by 15% over the past year, the price of plate steel rose from $753 per ton in 2013 to $863 a ton in 2014.
Railcar manufacturers are also buying in more steel in order to reinforce oil tank cars to comply with new federal guidelines.
Our understanding
Since the energy and the manufacturing sectors are slated to grow in America owing to the shift of government focus towards these sectors, the demand for steel in these sectors will obviously see a rise. From that perspective Nucor is well placed to cash in 0n the rising demand of steel. Also the steel sector cannot see sudden upgradations or trend shifts in the tech sector; hence, the growth in this sector would be more stable and for a longer time than the frequently changing tech sector. From that perspective it would certainly be beneficial to add Nucor into our portfolio to enhance its value in the long run. We recommend a strong buy in Nucor and wait till the rising demand pays off.
