EUR 850.00 For Business Accounts Only

Morningstar | Nucor's Elevated Profitability Will Persist Into 2019, but We Foresee Weaker Margins; $50 FVE Intact

Nucor enjoyed record profits in 2018 as the company benefited from increased trade protection and highly favorable metal margins. Nucor has historically proved adept at investing during cyclical troughs in order to participate more meaningfully during subsequent upcycles. Indeed, this legacy is a key element of our Exemplary stewardship rating for the company. Strong 2018 results are indicative of this pattern.

Having updated our valuation model, our $50 per share fair value estimate and no-moat rating are unchanged. Although share prices had recently touched our fair value in late-2018, we now view the stock as overvalued. Although our 2019 profit outlook is generally in line with consensus, we embrace a more bearish long-term outlook. We do not view prevailing steel prices and metal margins as sustainable. Instead, we believe 2018 will represent cyclical peak market conditions, even as trade protection persists. For 2019, we forecast $3.50 billion of EBITDA and earnings of $6.24 per share on $24.69 billion of revenue. This implies a 14.2% EBITDA margin. However, in 2023 (midcycle), we forecast only $2.97 billion of EBITDA on $21.77 billion of revenue, a 13.6% margin. These forecasts compare to a 16.3% EBITDA margin in 2018.

In the first quarter, management expects weaker sheet prices and margins to be partially offset by higher profitability from the company's bar and structural mills. This is consistent with our longer-term outlook that nonresidential construction will drive the lion's share of incremental steel demand in the U.S. over the next five years. Management expects steel products segment profits to remain flat sequentially while raw materials profits decline. Regardless, companywide profits will still remain elevated versus historical levels, setting the stage for strong results yet again in 2019.