Morningstar | Nucor's Margin Profile Converging With Our Long-Term Outlook; Cutting FVE on Lower Near-Term Profits
After updating our model to reflect slightly lower near-term profits, our fair value estimate for Nucor falls to $46 per share from $47. Our no-moat rating is unchanged. Although Nucor maintains an enviable position on the global cost curve for steelmaking, the cost curve is relatively flat. We expect Nucor to generate returns on invested capital roughly in line with its weighted average cost of capital over the long term amid midcycle market conditions.For 2019, we forecast EBITDA just shy of $3 billion on $23.5 billion of revenue, a 12.7% margin. We remain skeptical that the 16.7% EBITDA margin generated in 2018 would prove durable as cyclical peak market conditions rolled over. Although we expect further margin compression in 2020, the company's prevailing margin profile is now roughly in line with our long-term midcycle forecast.
We anticipate that Nucor will continue to gradually steal market share from higher-cost peers, particularly with investment already under way to expand capacity over the next five years. We expect metal margins to contract for the steel mills segment as the premium for U.S. steel prices decreases versus global export prices. This will take hold as the benefits provided by the Trump administration's steel tariff program gradually fade. Regardless, we forecast continued profit growth for the downstream steel products segment as U.S. nonresidential construction activity reaccelerates.
Nucor is currently trading well above our fair value estimate, with shares in 2-star territory. We forecast lower profits for Nucor over our five-year forecast period. Price-implied expectations, however, point to a slight increase for profitability from current levels. Given our outlook that steel prices will decline materially in the years to come, testing recent lows from late-2015, we find this outlook overly optimistic. At current valuations, we'd suggest investors avoid the U.S. steelmaking industry and seek out greener pastures.
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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