Is Nucor a Relatively Safe Way to Play the Steel Industry?
Steel stocks have come under selling pressure over the last few weeks. Companies like U.S. Steel (X) and AK Steel (AKS) are trading with massive year-to-date losses. ArcelorMittal (MT) has also pared most of its 2017 gains amid the sell-off in the steel space. While steel stocks continue to witness selling pressure, let’s see why Nucor (NUE) could be a relatively safe bet to play the steel industry (GGB).
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Nucor has a variable cost structure unlike companies like U.S. Steel and AK Steel. Because of its variable cost structure, Nucor is better placed to cope with volatility in steel prices. Nucor’s sensitivity to spot steel prices is lower than U.S. Steel’s. Notably, U.S. Steel tends to see wild fluctuations in its profitability due to its high sensitivity to steel prices and high fixed cost structure.
Nucor sounded optimistic about its position in the steel industry. Nucor expects its profits to rise more in 2Q17 after they hit a multi-quarter high in 1Q17. You can read Nucor’s 1Q17 Earnings: What You Need to Know to find out more about Nucor’s 1Q17 financial performance.
Nucor’s leverage ratios are lower as compared to some of the other companies including ArcelorMittal (MT) and AK Steel. Lower leverage reduces Nucor’s risk profile in down markets. Furthermore, Nucor has made some acquisitions recently that could be growth prospects. The company’s strong cash position also opens up several possibilities including acquisitions and possible share buybacks. Nucor also has a healthy dividend yield as can be seen in the graph above.
AK Steel has been among the worst-performing steel stocks in 2017. In the next article, we’ll see how analysts are rating the stock after its 1Q17 earnings.