Nucor Steel NYSE: NUE Investment Recommendation: Good in the face of bad. Great when things get good. Team C: Date: December 2, 2008 Nana Kwesi Brobey Carl Cheng Dana R. Malach Sehnaz Oner Tiffany H. Robertson Heath Waldorf
Nucor Background Information
Origins in auto, energy, and then commercial construction materials industries
Largest US producer of steel joists, steel deck, & standard building components in non-residential construction
HQ: Charlotte, North Carolina
Operating facilities primarily in the U.S. and Canada
Lean Management Organization: 20,000 Employees. Only 75 corporate staff.
No frill, no fat compensation for executives.
Small town USA roots: Builds strong ties to communities and states that foster growth of non-union jobs and tax incentives.
Instead of relying primarily on high cost raw materials (iron ore) to produce steel, Nucor historically has used scrap metal.
Nucor uses electric arc furnaces to convert scrap to steel. Lower cost to build and operate these “mini-mills.”
Nucor is North America's largest recycler: one ton of steel every two seconds
Hot and cold rolled steel steel service centers, fabricators, and manufacturers.
Steel joists, joist girders, &steel deck general contractors and fabricators.
Cold finished steel and steel fasteners distributors and manufacturers.
Nucor, through the David J. Joseph Company, also brokers ferrous and nonferrous metals, pig iron, and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap.
Growth potential : Energy & Infrastructure-related construction market.
An overall decline in steel consumption in 2008 and a further decline is forecasted for 2009.
The US auto-making industry, a large purchaser of steel, is facing bankruptcy.
Slowdown in aerospace production as a result of global economic crisis.
Global & Political Factors Affecting Nucor
Lower demand for Steel causing price deflation:
Competition from low cost Chinese steel.
Domestic Stimulus Spending on Energy & Infrastructure (Roads & Bridges.
Likelihood of protectionism and tariffs on foreign steel coming into US.
Significant cash on hand to put to use in acquisitions of both domestic and struggling foreign steel companies.
Ratio Analysis of Nucor Quick Ratio (MRQ) 2.02 Current Ratio (MRQ) 2.44 Long Term Debt to Equity (MRQ) 37.74 Total Debt to Equity (MRQ) 40.13 Return on Equity (ROE) per share 29.38 Return on Assets (ROA) 18.27 Return on Invested Capital (ROIC) 22.04
Manager’s Perspective of Nucor
The manager would be concerned with the overall business viability of the company. There are many tools the manager will need to look at; however, one major tool would be the return on equity (ROE).
Shareholders are primarily concerned with preservation of capital, capital appreciation, or dividends.
The company’s stock price is down from recent highs, but is outperforming its industry peers.
Nucor has consistently generated higher returns on equity than its peers.
As a potential shareholder we are most concerned with book value/share. If the company were to suffer a dramatic, unforeseen event, what would the company be worth?
Book value/share = common equity divided by shares outstanding
Q3 2008 $26.04
FY 2007 $17.76
FY 2006 $15.97
FY 2005 $13.75
Projected Cash Flow Analysis: See Appendix A
Goal of Cash Flow
Increase ROI on project level
Invest in projects with closest payback times
Invest to maintain monthly cash flow
Prefer independent projects where cash flows of one are unaffected by the acceptance of the other.
Diversify the customer portfolio to reduce risk of fluctuation in receivables.
Ratio Analysis: NUE vs. Competitors Within the Steel Sector, Nucor clearly provides better returns on equity, assets, and investment than competitors. Nucor Steel Dynamics US Steel ArcelorMittal Revenue 16.56B 4.38B 16.87B 105.21B EBITDA 3.02B 823.79M 1.72B 21.13B Current Ratio 2.44 1.54 1.89 1.44 Quick Ratio 8.87 9 5.21 9.85 ROE 29.38 28.08 17.79 21.09 ROA 18.27 15.91 12.94 11.84 ROIC 22.04 16.43 13.41 14.01
Nucor Stock Analysis
Stock price is driven by ROE, Profitability, & Dividends paid to shareholders.
Nucor’s stock has historically outperformed its benchmark index, the S&P 500. During the current economic crisis, NUE is performing in line with S&P. See Appendix B.
Stocks from all companies in the sector took a severe downturn in September 2008, as a forward looking indicator to the predicted slowdown in global steel consumption.
Nucor’s stock has historically traded in line with competitors, until recently when it has outperformed. See Appendix C.
Secondary Offering & Bond Sale
On May 29, 2008 Nucor sold 25 million shares at $74 per share netting $1.85 Billion to fund future operations and expansion. Relative to the current $35 share price, management was extremely successful in raising that much cash.
In May 2008 Nucor Corporation also sold $1 billion of debt in a three-part sale including a five-year and 10-year note issue and a re-opening of a 6.40% 30-year bond issue. Debt prices for offerings are much higher now than in May.
Future Outlook: Steel Industry
Industry is facing:
weakened economic conditions
Production cutbacks in the industry will help the supply of steel to remain consistent with demand, thereby stabilizing prices.
Demand for steel is growing in emerging markets such as China, so globalization is essential for companies in the steel industry to remain competitive.
The fact that the US dollar has been low in recent months relative to other currencies has helped to increase the amount of US exports.
The outlook of the steel industry is expected to improve by the second half of 2009 as the credit crisis subsides.
Future Outlook: Nucor Corporation
Continued strategy of growth through acquisition which has helped the company to remain profitable every year since 1966.
Expanding global reach through joint venture with Sidenor S.A. for the production and distribution of steel products in the Balkans, Turkey, Cyprus, and North Africa.
Consistent to rising dividend yield :
Payouts relative to share price.
Return on Assets should improve even though revenues will be down.
Price for a ton of steel has declined from $1080/ton to $570/ton. Scrap metal has dropped from $550/ton to $90 a ton. Nucor might be selling for 1/2 price but they are buying for 1/5 the price.
Key Points for Basis of Recommendation
“ Cash is King”: Nucor can afford to wait until things get better.
Secondary Offering raises $1.85 Billion. May ‘08
$1 Billion in cheap debt sold. May 2008.
Within the Steel Sector, Nucor clearly provides better returns on equity, assets, and investment than competitors.
Likely to benefit from US Government Stimulus Package focused on Infrastructure and Energy.
Overall, despite the current credit crisis, we expect Nucor Corporation to capitalize on the weakness competitors are experiencing due to the current economic downturn. We expect Nucor to continue making a profit and paying dividends while positioning for growth through acquisitions. Recommendation:
Appendix A: Cash Flow Forecast 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 Net Income (Loss) 1,224.36 1,288.80 1,516.23 1,783.80 1,471.95 1,757.68 1,310.28 1,121.49 62.78 Depreciation/Amortization 381.51 401.59 472.45 555.83 427.56 363.94 375.05 383.31 364.11 Net Incr (Decr) in Assets/Liab. (225.11) (155.25) (115.00) (100.00) -202.47 -83.99 357.63 -574.26 -26.12 Cash Flow from Disc. Operations n/a n/a n/a n/a n/a n/a n/a n/a n/a Other Adjustments-Net n/a n/a n/a n/a 238.27 213.61 93.65 99.19 93.84 Net Cash Flow from Operations 1,380.75 1,535.13 1,873.68 2,239.63 1,935.31 2,251.23 2,136.62 1,029.72 494.62 in millions of USD
Nucor – 1 Year Chart Nucor vs. S&P 500 1 Year Chart Nucor vs. S&P 500 5 Year Chart Nucor – 5 Year Chart Weekly Appendix B: Stock Charts