Since the title of this article largely hints at the conclusion, let me make it clear that I think Nucor (NYSE:NUE) is one of the best commodity companies in the world and maybe one of the best-run companies in the country. The question for 2012, then, is whether the market for steel products can develop even more favorably than a generally bullish chorus analysts already expect.
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2011 Ends on a Shrug
Although Nucor's year-on-year comparisons for the fourth quarter look strong, whatever happened last year may as well have happened 100 years ago for all it matters to current market conditions. So, 25% revenue growth and 120% earnings before interest, taxes, depreciation and amortization (EBTIDA) growth is all well and good, but largely irrelevant to investors. (For related reading on EBITDA, see EBITDA: Challenging The Calculation.)
What is decidedly more relevant is the 2% sequential decline in mill shipments, the 2% decline in scrap prices, the 6% decline in sales prices and the 17% decrease in margin-per-ton. All in all, like Steel Dynamics (Nasdaq:STLD), Nucor did a fair bit better than it had warned it might back in December. Better still, it looks like conditions have continued to improve into this first quarter of 2012.
A Few Curious Details
Looking over Nucor's report, it was interesting to see that shipments of plate and joists were down double-digits. On the other hand, structural products did pretty well, flat rolled wasn't too weak, and management saw flickers of life in the non-residential construction market. Mill utilization fell 3% to 71% for the quarter, more or less in line with the broader sector.
2012 Looking Better ... 2013 Looking Really Interesting
Like Steel Dynamics, Nucor management was cautiously optimistic about conditions for 2012. Management specifically mentioned autos and energy as potential sources of strength. Traditionally, Nucor has garnered fewer sales from autos than the U.S. steel sector as a whole - about 10% versus 25% - but the auto market does seem to be getting better.
Looking further out, 2013 should be an interesting year for Nucor. A new reduced iron facility should be online then, as well as an expansion in the company's SBQ operations. Couple that with what may be a more robust non-residential construction market and 2013 could be good times.
The Differences Matter
If the steel market is about to run, investors need to ask if Nucor is the way to play it. The conclusion may be a little counter-intuitive.
Nucor is the largest U.S. steelmaker and one of the most efficient - posting margins that are in the same neighborhood as Steel Dynamics, and well ahead of traditional mill operators like AK Steel (NYSE:AKS) and U.S. Steel (NYSE:X). But here's the thing - while the profitability of traditional mills are lower, they tend to outperform when steel is strongest.
What's more, scrap prices tend to rise with finished steel prices, and there may be more leverage at traditional mills relative to the tradeoff between finished steel prices and input costs like iron and met coal. For a company like Arcelor Mittal (NYSE:MT), which is just behind Nucor as the No. 2 U.S. producer and controls much of its own iron and coal needs, that could be significant.
The Bottom Line
I absolutely like Nucor as a company, but the nearly 40% rally since the fall of 2011 has taken a lot of the money to be made off the table. Nucor already trades at 7 times 2012 EBITDA estimates, and that's about where the stock should trade. Certainly there's a possibility that EBITDA estimates will go up if the steel market strengthens, but investors may find relatively better investment prospects in Steel Dynamics and/or Arcelor Mittal. (For related reading, see A Clear Look At EBITDA.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.