Market didn’t react to Nucor’s results
We have seen previously that Nucor (NUE) has been able to beat the street expectations as well as its own guidance in the second quarter results. This is normally associated with a reward from the stock markets. However, the market response was rather lukewarm to its results. The stock went up by only ~1%. In this section we’ll analyze the reasons why this happened.
Tough steel market conditions
While Nucor has been able to post good results for this quarter, the overall conditions in steel markets still remain challenging. The industry is marred by globally low capacity utilization as well as weak demand from key consumers like housing and infrastructure. To make matters worse, there’s a tsunami of cheap imports that has been hampering any recovery in the U.S. steel industry.
The sustainability of growth
Markets like growth numbers that are more sustainable rather than a one off event. Due to the adverse weather conditions earlier this year, a lot of Nucor’s competitors like U.S. steel Corp (X) faced disruptions in their production. As a result, Nucor was able to get a lot of customers from its competitors. While positive for the sales number this year, the ability of Nucor to retain these customers over a long period remains doubtful given the commodity structure of the products it manufactures.
Nucor’s current premium
Nucor enjoys a valuation premium compared to its peers. The previous chart shows the earnings valuation (or E) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) multiple for Nucor with its peers. Historically, Nucor has been trading at higher valuations compared to its peers. This high valuation has already been priced by the markets, which limits the upside potential.
© 2013 Market Realist, Inc.