EUR 850.00 For Business Accounts Only

Morningstar | NUE Updated Forecasts and Estimates from 07 Nov 2018

Nucor maintained its impressive momentum in 2018 as favorable market conditions have enabled elevated profitability. Year to date, Nucor, along with its U.S. steelmaker peers, have enjoyed unusually wide metal margins as tariff protection has sent steel prices sharply higher and scrap prices have risen only modestly. However, we see no additional upside catalysts ahead. We anticipate that metal margins will normalize over the medium term, although both steel and scrap prices will experience a downward trajectory. Our $50 per share fair value estimate and no-moat rating are unchanged.

Nucor shares continue to reflect optimism that current market conditions will prove durable, but we remain skeptical. In the medium term, we anticipate that redirected trade flows and U.S. capacity additions will cause metal margins to contract. Over a longer time horizon, less restrictive trade policy will likely drive further contraction. Regardless, our long-term metal margin forecast remains wider than the average spread realized over the trailing five-year period.

Even so, as our forecast for lower steel prices plays out, Nucor will be better positioned than its blast furnace-operating peers to weather the storm. The company has proven its resilience through challenging market conditions a number of times in the past. Nucor has been unprofitable only one year since 1966 and has consistently increased its dividend for a number of decades. This is due, in large part, to the company's disciplined capital allocation. Nucor has avoided speculative investments during cyclical peaks and has made opportunistic investments during cyclical troughs. For example, the company's direct reduced iron production facility has proven valuable over the last couple years. It has helped support elevated profitability versus what would be achieved via the use of imported pig iron.