Morningstar | Nucor Reports Record Profits in 2Q, but We Contend That Steel Prices Have Peaked; $50 FVE Unchanged
The spread between U.S. and world export steel prices continued to widen during the second quarter, providing a favorable operating environment for U.S. steelmakers relative to their global peers. This dynamic, combined with a sizable metal margin expansion in the U.S., helped Nucor deliver record second-quarter profits. The company reported $914 million of earnings before taxes, up 80% from $508 million in the prior-year period. With steel prices across Nucor's key product lines outpacing our prior expectations, we've increased our near-term profit outlook. However, with our long-term forecasts effectively unchanged, our fair value estimate of $50 per share remains intact. We also maintain our no-moat rating for the company.In Nucor's second-quarter results, the sharp increase in profits for the flagship steel mills segment was widely expected. On a per ton basis, earnings before taxes for the steelmaking operations rose to $149 from $95 in the prior-year period. Although elevated profit levels should prove sustainable through year-end, we forecast a return to sub-$100 per ton profits in 2019. In the company's financial results, we were perhaps most surprised by the fact that earnings before taxes for the steel products segment grew 86% year on year even though steel input costs increased sharply. This was driven by an impressive 17% year-on-year increase in shipment volumes as well as higher average selling prices.
In the third quarter, management is guiding to even higher sequential profits, with sheet and plate mills representing a pocket of particular strength. However, the company is also guiding to flat steel products profits and margin contraction for the raw materials segment. We see no further upside for U.S steel prices and view current levels as unsustainable. While the general operating environment will remain supportive for Nucor in the second half, we expect profitability to soften modestly before declining more meaningfully in subsequent years.
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.
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