Nucor has fallen 13.0% in the second quarter. The company has pared its 2019 gains. The stock is trading almost flat for the year. The stock has been a relative outperformer in the steel space. Other steel stocks like U.S. Steel Corporation (X) and AK Steel (AKS) are sitting on massive year-to-date losses. Nucor’s valuation multiples are largely in line with its long-term averages. The stock is valued at a 2019 and 2020 EV-to-EBITDA multiple of 5.8x and 6.3x, respectively. Analysts expect Nucor’s earnings to fall in 2020 and remain at the same level in 2021.
Growth and outlook
Talking of growth, Nucor (NUE) is investing in several new projects on long and flat steel products. The company is also investing in expanding its value-add product offerings. Nucor is aggressively targeting the auto steel market. AK Steel sells most of its steel to automotive customers. Competitive bidding in the space has hurt AK Steel’s average selling prices.
Nucor’s growth pursuits should bear fruit in the next decade. Although several brokerages, including Bank of America Merrill Lynch, expect rising US steel production capacity to be a bearish driver for domestic steel prices, Nucor and Steel Dynamics are low-cost producers. They should be able to better combat lower steel prices compared to integrated steel producers like U.S. Steel Corporation.
Nucor and Steel Dynamics produce steel in electric arc furnaces. They mainly use steel scrap as the raw material. Since steel prices and scrap prices tend to move in tandem, both of these companies are able to better protect their margins compared to integrated steel mills. Nucor could be among the biggest benefactors in the steel space if the Trump Administration moves forward on the long-awaited infrastructure investments.
Steel Dynamics could be a better play if investors want a relatively safer bet in the steel industry. Steel Dynamics’ capacity utilization rate is among the highest rates in this industry. Steel Dynamics’ valuation gap with Nucor has risen since its recent underperformance.