Since the mid-January Nucor is performing really well rallying from around $35 to around $50 per share. The main reason is improvement on steel market. Generally we can see that commodities are well performing in 2016, which is interesting because normally commodities are negatively correlated with USD and now the opposite is happening. Is growth sustainable?

Steel market is highly cyclical. Years 2009-2014 were difficult and in 2015 company generated a decent cash flow from operations. With improvement of steel prices it is rational to expect further increases in generating cash flows.

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This is confirmed in Q2 guidance:

Nucor expects second quarter results to be in the range of $0.65 to $0.70 per diluted share. This range is an increase compared to the second quarter of 2015 earnings of $0.39 per diluted share and the first quarter of 2016 consolidated net earnings of $0.22 per diluted share. 

Momentum of financial results is strong with almost doubling EPS on a yearly basis. On the other hand for next year company is traded at:

EV/EBITDA = 7.3

P/E = 16.4

In my opinion these multiples are not low taking into account high uncertainty of business. The question is whether results from 2018 onwards can further improve. The operating leverage in this business is super high. Imagine the company is generating the same EPS as in 2008 (unlikely?). Then valuation is cheap.

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Surely there are always worries about China, global growth etc., but on the other hand some protection taxes can be supportive. Market cap is “only” $16b and recalling in 2004-2008 up-cycle company returned $4b to shareholders. Strong commitment of management to returning cash to shareholders is the most important issue for dividend investors.

 

Summing up, I am not an expert in steel market but what I see is that steel market is improving and company is profiting from this growth. Normally cycles lasted for few years so if new cycle is starting then it might be still a good idea to buy shares with few years horizon. I raise my investable level to $43.

 

Disclosure NUE – no position