Why Nucor Corporation didn't rally despite good results (Part 3 of 5)
Why Nucor has been able to post better-than-expected results
Better-than-expected results for Nucor
The second quarter results for Nucor were better than the analysts expected as well as its own guidance. Nucor posted $0.46 of earnings per share (or EPS) and exceeded its own guidance of $0.35–$0.40. This was also better than the average expectations of Wall Street analysts. In this section we’ll analyze the various factors that helped Nucor post higher profits.
- Better performance of the steel mills segment – Steel mill is Nucor’s largest segment. Steel mill profitability increased at Nucor owing to strong demand as well as supply disruptions at some of its competitors. Due to these disruptions, caused by adverse weather earlier this year, Nucor was able to get some customers from its competitors.
- Softening raw material prices – Steel scrap and energy are the two key raw materials for Nucor. The previous chart shows the movement in scrap prices compared to previous quarters. You can see the prices have come down 4% from the first quarter prices.
- Higher capacity utilization – Globally, the steel industry is hurt by low capacity utilization. It impacts steel companies like Nucor (NUE), ArcelorMittal (MT), U.S. Steel Corporation (X), and Reliance Steel & Aluminum (RS). The fixed costs in a steel plant are sticky and lead to higher per unit cost of production when capacity utilization is low. Since steel companies don’t have much pricing flexibility due to competition and the undifferentiated nature of their products, this increase isn’t easy to pass to the customers. This leads to lower profit margins for steel companies. The capacity utilization rate has improved for Nucor.
In the next section we’ll analyze the impact of Nucor’s strong results on its share price. It’s important to note that apart from the steel companies listed above, the SPDR S&P Metals and Mining ETF (XME) also invests in steel companies listed in the U.S.