Why Is Nucor Stock Dropping?

The steel industry isn’t necessarily the most exciting one in the world but it sure is a moneymaker.

It remains crucial for the manufacture of cars, bridges, and infrastructure more generally and, if analysts are to be believed, the steel industry might be on the cusp of an upward trend. They expect demand to rise for steel products, especially in developing countries.

On the supply side, steelmakers are investing in new technology and improving their processes to keep up with this rising need for steel.

Innovations like automated robotic systems, advanced monitoring sensors, and data analytics have greatly increased the quality and uniformity of steel products. In addition, new recycling technologies help to reducing waste and lower energy usage.

Among the leading players in the space Is Nucor Corporation (NYSE:NUE), the biggest producer of steel and related products in North America, making roughly one-fourth of all US raw steel and supplying more than 10,000 customers.

So, can Nucor benefit from positive industry trends?

How Nucor Is Escaping Industry Cyclicality

In March, Nucor announced a deal to buy Rytec Corporation, which manufactures and sells fast, high-quality doors for businesses. The $565 million purchase is set to be paid in cash and represents a 12.5x multiple on what Rytec expects to earn before interest, taxes, depreciation, and amortization this year.

The purchase of Rytec is slated to help Nucor expand beyond its main steelmaking operations and into related businesses that use steel products.

Adding high-performance doors opens the opportunity to cross-sell with other Nucor businesses and increases the breadth of Nucor’s product list in commercial markets.

Nucor’s corporate development team was clearly busy because a month later, Nucor management announced that it had bought Southwest Data Products Inc. (SWDP), a company that makes and installs data center infrastructure, for $115 million. SWDP’s office and factory are in San Bernardino, California, where the firm employs about 147 workers. Buying SWDP is designed to help Nucor invest in steel-focused businesses outside the cyclical steel industry.

Other acquisitions it has made bolster the perception of Nucor as being merely a steel manufacturer and strengthens it as a chosen supplier for many of the nation’s largest and most innovative hyper-scale cloud and colocation data center operators.

Sales and Profits Slide

Nucor’s results for the first quarter revealed a slowing top line. In Q1, the company’s net sales decreased by 6.6% compared to last year, amounting to $8.14 billion. EBITDA fell also, by 20.3%, year over year, and came in at $1.50 billion.

In the same quarter, Nucor’s cash from operating activities was $459.65 million, down by 61.9% compared to last year.

Net earnings and EPS fell by 25.7% and 22.2%, respectively, versus the year prior to $844.84 million and $3.46, respectively.

Looking to the future, management forecasts Q2 earnings will be between $2.20 and $2.30 per share. The main reason for expecting lower earnings is that the steel mill segment is earning less money. Selling prices are lower on average and the company is selling fewer quantities than before.

Still, profits in the raw materials segment are expected to be higher in the second quarter of 2024 than in the first quarter due to the company’s reduction in use of iron plants.

Why Is Nucor Stock Dropping?

Nucor stock has been dropping due to declining year-over-year sales for the past seven quarters in a row. As a result of the top line challenges, earnings have been increasingly looking weak too.

EBIT for example, which was as high as $3.5 billion in Q2 2022 has fallen to less than $1 billion in the most recent quarter. 

With management further lowering expectations for both revenues and earnings, it seems there is lackluster interest among investors.

With all that said, a bright spot appears to be the management buyback that Nucor has in place, suggesting that insiders at the very least are bullish on future prospects.

So, is Nucor a good investment now?

Is Nucor Stock a Buy?

The consensus forecast among analysts covering Nucor is that the stock can rise to as high as $185 per share. 

The caveat to this bullish prediction is that a 5-year discounted cash flow forecast paints a much more pessimistic picture and suggests the share price is fairly valued at $158 per share.

In that same vein, 4 analysts have downgraded their earnings estimates for the stock for the upcoming quarter, in tandem with management’s more gloomy forecasts.

If there were one really bright spot for shareholders it is that the company has a consistent habit of paying dividends that amount to a modest but so far reliable yield of 1.44%. The dividend has been on the rise for the past 14 years and the payout streak has been consistent for a full 52 years.

And trading at a little over 10x earnings, Nucor isn’t the worst deal in the world on a multiples basis, but prospective buyers should be aware that growth is expected to slide by 2.2% annually for the next 5 years.

So too are revenues expected to remain fairly flat, and grow at just 1.8% annually, so while there’s not a lot to get excited about, this may end up as a slow and steady income generator.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.