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Tickers in this Article: NUE, RS, X, ATI

The steel-making reporting-season began last Thursday when the two leaders of the sector, Nucor Corp. (NYSE: NUE) and Reliance Steel (NYSE: RS), published their reports. In a few days, the reports of two more steel-making giants -- Allegheny Tech (NYSE: ATI) and U.S. Steel (NYSE: X) will be published. Nucor Corp. and Reliance Steel have shown results that exceeded analyst expectations. In this article, we will take a closer look at Nucor.

NUE Profit
Nucor, a Charlotte-based scrap metal recycler, announced that its profit-per-share for the first quarter grew by 4% to $1.26 from $1.21 in the first quarter of 2006. Two cents more analysts expected.

At the same time, net earnings have remained virtually unchanged, constituting $381,029 compared with $380,031 a year ago. The 4%-per-share growth in profits is explained by the decrease in outstanding shares to 303,482 from 313,748 a year ago.

Nucor's consolidated net-sales increased 6% in the first quarter of 2006, despite a 4% decrease in the production volume and 1% decrease in total steel shipments. Favorable price-tendencies in the market helped this result. Compared with the first quarter of last year, the average sales-price per ton increased by 6%.

Tendencies Over the Last Quarter
If we look at the changes that have taken place compared with the fourth quarter of 2006, we'll see that the situation is a bit gloomy. Profits have fallen by 6%. This, despite a net sales increase of 9% (owing to the 10% growth in production volume and 12% growth in total steel shipments). Its also worth noting that the net sales growth was achieved despite the 2 % slump in sales prices.

Under these conditions, the main reason for the decrease in profits is the 9% growth in the price of scrap metal. Since scrap metal is used as the raw material for steel production, its price is one of the main factors influencing the cost of Nucor's production. The key factor in Nucor's success is growing demand for metal. Despite the slight slump in the economy -- and in particular the housing sector, the volume of metal consumption by non-residential construction, shipbuilding and railroads during the first quarter kept growing. The reduction in general steel inventories also favors Nucor. This will boost further growth and the demand for metal.


Risk Factors

Despite the overall favorable climate around Nucor and other steel makers, there are three factors that can have a negative impact.

1 -- the unclear price of scrap metal
2 -- the looming slump in the economy
3 -- the increase in energy costs

Nucor is counting on a drastic reduction in the cost of scrap metal. However, in my opinion, these hopes are optimistic. It also assumes that there will be increased demand for its steel products, but any slump in the economy should call this assumption into question. Finally as gas prices continue to rise, so does the cost of smelting and producing steel.

In addition, there are external risks. Nucor depends on its shipments abroad, but there is growing pressure from competition in developing countries, whose cost price is much lower than American steel makers.

Conclusion
At the moment, the steel-making sector is on the rise. This is confirmed by the quarterly reports of its market leaders. However, there are risks that could uproot this success. Primarily, these are the high scrap prices and uncertainty around the demand for steel production.

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