Nucor Corp., the second-largest steel maker in the United States, faces a tough market plagued by overproduction and cheap imports.
Yet the stock is weathering the turmoil in financial markets, closing at $44.92 (U.S.) on the New York Stock Exchange yesterday, down 43 cents from Monday, but not far off its 52-week high of $52.50.
One of the few consistently profitable U.S. steel makers, the company is hopeful that revenue will start to climb after the industry recently announced hefty price increases out of optimism that the market for steel is turning the corner.
However, the mini-mill company based in Charlotte, N.C., held its increase in the price of hot-rolled steel at $20 a ton, half what the rest of the U.S. industry is trying to put in place.
"We don't see a market supporting more than $20 for hot-rolled," said president and chief executive officer Daniel DiMicco, who took the helm last fall.
In addition to being battered by falling demand for steel as its main customer, the auto industry, curtails production because of the sharp slowdown in the U.S. economy, American steel makers also face a flood of cheap imports.
Referring to the price increase, steel analyst Waldo Best of Morgan Stanley Dean Witter told The Wall Street Journal that "there may be some sucker out there who will pay . . . but these price increases have no hope of sticking."
Industry experts say the U.S. industry counts for only a small share of global output and is too small to affect worldwide steel prices. "Most of the time, U.S. mills are engaged in a wishful thinking when they announce price increases," said Robert Crandall, an economist with the Brookings Institute, a Washington think tank. "These guys can't influence the market any more. Steel is a world market, and they are too small."
Underlining the tough times in the rust belt, the No. 3 steel maker in the United States, LTV Corp., filed for Chapter 11 bankruptcy protection in late December because of the slowing U.S. economy, increasing to eight the number of companies in the American steel industry under protection. And there could be more to come, analysts say.
"We believe steel prices will eventually rebound from current depressed levels," said Peter Ward, a steel analyst with Lehman Brothers. "However, given the very sluggish economic environment, we are skeptical of price increase attempts in the short run."
Last month, Nucor reported fourth-quarter profit fell 18 per cent because of tough competition from imports and lower demand.
In the final quarter, profit was $79.8-million or $1.03 a share, compared with $97.6-million or $1.12 a year earlier. Profit exceeded analysts' expectations of 74 cents a share. Sales fell 7.5 per cent to $1.01-billion.
For the full year, profit climbed 27 per cent as a result of strong sales and shipments early in the first half. Profit was $310.9-million or $3.80 a share, compared with $244.6-million or $2.80 a year earlier. Analysts had been expecting profit of $3.52 a share.
This year, analysts are forecasting profit of $2.95 a share, rising to $4.12 next year.
"We believe Nucor shares are attractive on a relative valuation basis," said Mr. Ward, who rates the stock a "market performer."
"Accordingly, we like the risk return of these shares."
The company has a strong balance sheet and maintains a high degree of financial flexibility, he added.
Nucor drastically altered its management structure after the board of directors overthrew founder and president Kenneth Iverson in November of 1998. At that time, the stock price had fallen and debt had risen.
Recently, the company has taken a harder line against imports, and said it plans to make acquisitions in the future, abandoning its traditional approach of building from within.
"Management has done a great job of running the company," Mr. Ward said, "but nonetheless, industry fundamentals are a concern.
"We believe short-term cyclicals will improve, but it is difficult to find a fundamental catalyst [that]would lead to sustained relative outperformance."
Last week, Nucor increased its quarterly dividend by 2 cents to 17 cents. The company has increased its dividend annually for the past 27 years.
Bottom Line: Analysts see Nucor stock improving over the longer term as a stronger economy generates higher demand and rising prices increase revenue.
Nucor: vital statistics
Business description Manufactures steel producst including carbon and alloy steel, steel joists and joist girders, steel deck, cold finished steel, steel grinding balls, steel fasteners, steel bearing products, and metal building systems. Head office: Charlotte, N.C. Telephone: 704-366-7000 Web site: http://www.nucor.com NYSE symbol: NUE, $(U.S.) Employees: 7,500 Share values Trailing 12-month earnings per share...$3.80
Trailing 12-month P/E ratio 11.82 Annual dividend 68¢ Dividend yield 1.51% 52-week intraday high $52.50 52-week intraday low $29.50 Last close $44.92 Change from previous -43¢ 1-year total return -2.20% 59-month average annual return -4.77%
Source: Bloomberg Financial Services; Thomson Financial Datastream; http://www.globeinvestor.com