Nucor Is Set For Its Best Year (NYSE:NUE)
Nucor Corporation (NYSE:NUE) is North America’s largest and most diversified steel and steel products company. It is also one of the most profitable businesses in the basic materials sector. According to New Constructs, the company, along with Dow Inc. (DOW), LyondellBasell Industries (LYB), Freeport McMoRan (FCX), and Linde plc (LIN), are responsible for 53% of the sector’s core earnings. The company has built a green business with an incredible history of profitability, and 49 straight years of dividend increases. Nevertheless, the company is trading at very attractive levels, as the market seems determined to ignore the favorable economic conditions surrounding the company.
Nucor operates 25-scrap-based steel mills that generate 28 million tons of steel a year. The steel mills segment is the company’s largest, making up 66% of revenue. Recycling scrap metal enjoys enormous advantages over traditional steel makers. Steel, an iron alloy, is produced from a combination of metals and non-metals such as carbon, iron and tin. Since the 1970s, more than 60% of steel in the United States has been recycled. Most metals can be recycled repeatedly without losing any of their properties.
The company also produces a highly diversified portfolio of 6 million tons a year of steel products, and sells some raw materials as well.
In the company’s 2021 annual report, CEO Leon J. Topalian, referred to the strong demand that drove Nucor’s exceptional results that year. In 2022, results are likely to be stronger, given rising inflation. Indeed, a side-effect of Russia’s invasion of Ukraine and rising tensions between the West and China, is that the West will be forced to shift its sources of supply to friendlier countries. I anticipate more demand for American steel from the European Union as a result of the need to divest from potentially adversarial partners. The combination of inflation and geopolitically driven supply-chain changes, will drive prices up.
Recycling has an obvious positive benefit for the environment, which should interest ESG investors who want to encourage environmentally sound practices. Remember: aside power generation, the iron and steel industry are the most polluting industries in the world, contributing 7% to 9% of global emissions. The industry has struggled to develop “green steel,” because of the harm that traditional steel production does to the environment.
Nucor is recognized as being one of the cleanest steelmakers in the world, something which can be said of the U.S. steel industry as a whole.
Nucor Has Been Staggeringly Profitable
In the last decade, Nucor has grown revenue from $19.43 billion in 2012, to nearly $36.5 billion in 2021, compounding at 6.51% per year.
The company has also grown its profitability, with net earnings rising from nearly $505 million in 2012, to $6.83 billion in 2021, compounding at 29.75% a year. 2021 was the most profitable year in the company’s history, beating the 2018 high-water mark of $2.18 billion.
Recycling steel is very cost-effective because recyclers do not have to incur the massive capital outlay needed to produce steel, either as a direct product or as by-product. The result of this low, variable cost base, and Nucor’s cash generation, is that recyclers are able to enjoy high returns on invested capital (ROIC), which are not typically enjoyed by firms in the metals and mining sector. Between 2017 and 2021, Nucor earned a 5-year ROIC of 17%. ROIC for the 2,000 largest companies in the United States was 6.9% in 2021.
Nucor has grown free cash flow (FCF) from over $303 million in 2012 to more than $4.6 billion in 2021, at a compound annual growth rate (CAGR) of 31.3%.
Nucor’s Shareholder-Friendly Capital Allocation Strategy
The company’s financial performance is testimony to its ability to allocate capital to value-adding opportunities. The company has been able to pursue these opportunities without becoming excessively indebted. In 2021, the company had a net debt to total capital ratio of 0.14. Current liquidity in 2021 was $4.3 billion and Nucor has an undrawn $1,75 billion credit facility which matures in 2026. In fact, Nucor has the highest credit rating in the North American steel sector, with a rating of Baa1/A-.
In the last three years, Nucor distributed $1.47 billion in dividends, which represents 13% of operating cash flows. The company is committed to returning 40% or more of its net income to its shareholders in the form of dividends and share repurchases. In the last three years, the company has averaged 58% of net income. In 2021, the company returned $3.8 billion in cash to its shareholders, which represents 55% of that year’s net earnings. Over 49 years, Nucor has constantly increased its dividend payout.
The company’s shareholder-friendly policies appear in even more favorable light when you zoom out. Over the last decade, the company has had a 10-year average payout ratio of 72%, and returned $9.4 billion to its shareholders.
With FCF for the trailing twelve months (TTM) of $7.2 billion, and an enterprise value of $42.27 billion, Nucor has a FCF yield of 17%. This is very attractive, especially in the light of the 1.6% FCF yield for the 2,000 largest companies in the United States. This shows that the company’s growing FCF is available at a very attractive price, and suggests that the company’s underlying and stock performance is likely to be very positive going forward.
Nucor has a price-earnings (P/E) ratio of 4.46, compared to a 5-year average of 13.68. The company is even more undervalued when you consider that, according to data from Aswath Damodaran, the metals and mining sector has a P/E ratio of 48.19. The company is also deeply undervalued in terms of the S&P 500, which has a multiple of 21.75.
Nucor has an admirable business model that will appeal to ESG investors. In 2021, the company had its best ever year. Given current economic conditions, the company’s profitability is likely to exceed that of 2022. Yet, despite an incredible history of profitability, and a favorable economic environment, Nucor is trading at a low level compared to its 5-year average, its peers and the broad market. The company has shown an ability to grow its FCF at a very high clip over the last decade. Those fast growing free cash flows are trading at a very attractive rate, compared to the 2,000 largest companies in the world.