Morningstar | Nucor Issues Steady First-Quarter Results, but We See Lower Profits Ahead as Metal Margins Contract
Nucor shares traded modestly higher after the company issued first-quarter earnings showing material profit growth versus the same period last year. Having updated our valuation model, our $50 fair value estimate and no-moat rating are unchanged.Nucor's earnings before taxes grew 34% to $690 million from $516 million year on year. Higher profits were driven primarily by strong results from the company's plate, bar, and structural mills within the flagship steel mills segments. The raw materials segment represented a notable point of weakness, as profits fell sharply year on year after excluding a one-time $34 million gain on the sale of an equity method investment. Profits from the downstream steel products operations were solid and should pick up steam over the next couple quarters due to typical seasonality.
Although first-quarter results were fairly steady overall, we still expect full-year 2019 profits to fall as metal margins contract. Steel prices across nearly all of Nucor's key product types declined sequentially without a commensurate reduction in scrap costs. We anticipate that metal margins will continue to contract as the pricing premium for U.S. steel products above world export prices gradually decreases. Accordingly, we reiterate our view that 2018 will represent a cyclical peak for the broader U.S. steel industry.
For Nucor, we forecast EBITDA of $3.48 billion on $24.76 billion of revenue. However, over our five-year explicit forecast period, we expect EBITDA will fall to a midcycle (2023) level of $2.82 billion. This represents a negative 7.6% CAGR as our outlook for materially lower steel prices and margin contraction both take hold. Shares continue to trade above our fair value estimate, and we'd encourage investors to approach the U.S. steelmaking space with caution. We see more opportunity across basic materials industries that have less leverage to Chinese fixed asset investment.
Nucor manufactures steel and steel products. The company's operations include international trading and sales companies that buy and sell steel and steel products. The company's segments are: steel mills, which produces sheet steel, plate steel, structural steel, and bar steel; steel products, which produces hollow structural section steel tubing, electrical conduit, steel joists and joist girders, steel deck, cold finished steel, steel fasteners, metal building systems, and wire and wire mesh; and raw materials, which produces direct reduced iron (DRI), brokers ferrous and nonferrous metals, pig iron, hot briquetted iron and DRI, supplies ferro-alloys, and processes ferrous and nonferrous scrap metal.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.