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Investment thesis

Nucor (NYSE: NUDE) manufactures and sells steel products. The infrastructure spending bill is expected to result in an additional steel demand of 4-6 million tonnes. So you have a very high demand for steel.

At the same time, the price of steel is close to a 5-year high and is expected to rise further.

In addition, many of Nucor’s European or Russian-based competitors are now withdrawn from the market for various reasons, but nonetheless excluded from competition.

Meanwhile, Nucor’s balance sheet is very strong today, with approximately $2.5 billion in net debt, or less than 0.4 times net debt to EBITDA.

All in all, here’s why I think it’s compelling to pay about 7x this year’s free cash flow for this business.

Investor sentiment improves for NUE stocks

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If you follow this space, you already know the overall narrative. Steel production fell due to a myriad of factors. And the companies that are extremely well positioned to benefit are in the United States.

Natural gas is one of the largest input costs to making steel. With low natural gas prices in the US compared to many parts of Europe, US manufacturers have a huge advantage in being able to underprice the competition.

Moreover, there is no realistic reason to expect near-term steel demand to decline. Finally, bringing new supplies online could take at least another 2-3 years. The perfect storm for US-based steel companies, combined with low valuations.

Nucor’s revenue growth rates will remain strong in the near term


Nucor revenue growth rate

Nucor had a very strong 2021, so any comparison to the previous year will likely look less impressive this time around.

However, you don’t need three-digit growth rates for this business to be attractive. You just need a few more quarters of these positive dynamics coming together for investors to be rewarded significantly here.

Why Nucor? Why now?

Nucor manufactures steel and steel products, including steel bar, plate and piling, to name a few.

Nucor Investor Presentation

Nucor Investor Presentation

Essentially, its end markets are mainly in construction and “heavy industry”. As a result, these end markets have strong pent-up demand, especially given President Biden’s infrastructure bill.

Also, as you know, the largest steel manufacturing exporter is China. And China has signaled its intention to cap its steel production, in a bid to reduce carbon emissions.

Then you add to that this Russian sanctions dynamic, and you end up with a situation where you have a lot of demand, combined with supply shortages.

Trading Economics, steel prices

Trading Economics, steel prices

Therefore, even though steel prices are slightly lower than the same period a year ago, the general trend is clear, steel prices are close to a 5-year high. And should not stop increasing anytime soon.

Also remember that a ceasefire in Ukraine does not mean that sanctions will soon be lifted.

And not to say the obvious, but steel production isn’t like software where you can just write code and deploy it globally.

To that extent, President Biden just this week sought to remove tariffs on steel from British imports. But what we are talking about here is just a drop in the bucket. It’s a headline that does very little to significantly alleviate supply constraints.

Here’s the backdrop, the deal will allow 500,000 metric tonnes of British steel to be imported duty free into the United States. This compares to approximately 26-28 million tons imports that the United States makes in a year.

Therefore, the indication seems to indicate that Nucor’s profitability will remain strong for a few good years.

Nucor Free Cash Flow

Nucor has approximately $2.5 billion in net debt. For a company that has made about $4.6 billion in free cash flow, this is a very strong financial position.

Moving on, Nucor expects to hit a new record first-quarter profit of $7.25 at the midpoint. Compared to the same period a year ago, this is a year-on-year jump of 134%.

To give you some insight into the strength of Nucor’s near-term outlook, year-to-date Nucor has returned $630 million to shareholders through share buybacks and dividends. This implies that in less than 90 days, shareholders obtained 1.5% return on capital. And that doesn’t include any stock appreciation, which is always very much there.

Looking ahead to 2022, assuming the current pricing environment, along with the company’s forecast for capital expenditures to increase to approximately $2.3 billion, we should see approximately $5.5 billion in free cash flow this year, a jump of about 20% over last year.

NUE Stock Valuation – Cheap

If we take my free cash flow estimate, the stock price is about 7 times this year’s free cash flow.

However, obviously that multiple is based on this year’s free cash flow, which I think is as good as yours. In fact, no one knows exactly how steel prices will develop throughout 2022.

What we do know is that currently in Europe, with soaring natural gas and electricity prices, it is rapidly becoming unprofitable to produce steel. Plus you have China wanting to cap production, Russian sanctions and the Europeans struggling to produce steel. The lasting impact of all these different macro aspects is completely unpredictable.

That being said, I tend to think this opportunity is compelling.

The essential

As always when investing in commodities, there are so many known unknowns and so many different unknowns. How much steel will China import from the world? How long do the sanctions against Russia remain in place? Will the price of gas in Europe come down to make steelmaking more economically viable?

All of these estimates have dramatic implications. On the other hand, from what we can see in the very near term, the outlook here is probably the best it’s ever been for Nucor. Although, how long it lasts is anyone’s guess.

All in all, I’m very bullish on this space, but I’m invested in a smaller peer, where I think its edge is even more compelling. Whatever you decide, good luck and good investment.