Nucor’s (NUE) management believes that “their best days are still ahead.” We try to decode several factors that are behind this optimism.
Tough stance on dumping
Nucor and other steel companies in the U.S. like ArcelorMittal (MT), U.S. Steel Corporation (X), and Reliance Steel & Aluminum (RS) have been hit hard by the impact of dumping. Recently, the Department of Commerce (or DOC) imposed anti-dumping duties on import of tubular steel from nine nations. Although this order didn’t have much relevance to Nucor because it isn’t a big player in the tubular segment, it does signify that fact that government authorities are finally getting sensitive to the pending demand of the industry. It’s important to note that the import of cheap steel is the biggest problem the U.S. steel industry faces today.
Opportunity for acquisitions
As discussed earlier, Nucor has comfortable leverage and liquidity ratios. The management has indicated that it’s looking at acquisitions, that can further add to shareholder value. Nucor basically looks at the following three factors to consider an acquisition.
- Geographical diversification
- Product diversification
- Access to new customers
Nucor didn’t participate in the recent bidding for North American assets of Severstal because it didn’t meet their criteria for acquisition. The tough market conditions still persist. A lot of players are making huge losses and creating the possibility for other companies to be available for acquisitions. Nucor has a successful track record of acquiring and consolidating several companies, which adds to shareholder wealth.
Further improvement in the construction market
Nucor is the largest supplier of steel to the construction industry. The industry still hasn’t recovered from the clutches of the recession. According to estimates of Nucor’s management, in nonresidential construction, the market is only 60% of the peak values. Nucor has been able to grow its revenues almost to the pre-crisis levels without its biggest market rebounding. The sector has been showing signs of improvement. The management has expressed its confidence in further improvement in this market. The improvement in the construction industry will drive the performance of Nucor in coming quarters.
Investors should note that the SPDR S&P Metals and Mining ETF (XME) invests in steel companies in the U.S. and can be considered to gain exposure to the steel industry.