The steel industry has seen its ups and downs over the past few years. Steel stocks surged to highs during the construction booms of the 2000’s. These stocks came crashing down during the market depression of 2008. Many of these companies still have not recovered and are still trading at discounted prices.
Let’s take a look at a popular steel stock, Nucor Corporation. You may have heard of Nucor before. The stock is a favorite of CNBC’s Jim Cramer. He likes the company’s integrated supply chain and management team.
Nucor is one of the largest steel companies in the United States. The company has grown in recent years through strategic acquisitions. Nucor has a number of competitors in the industry such as US Steel, Mittal Steel, and AK Steel. The steel industry is incredibly competitive and companies pricing power is based on spot prices and global demand. Steel stocks thrive during robust economic cycles and struggle during economic lulls.
Nucor Corporation (NUE) has fallen into high yielding territory. It’s rare that a steel company ever becomes an attractive investment based on its yield. Nucor Corporation is currently yielding 3.8%. Compare that with the 0.40% yield of US Steel and the 1.5% yield of AK Steel. Even Mittal Steel which has a decent yield is only paying out 2.1%.
Nucor generated $11.2 billion dollars in revenue last year and earned $293 million in net income. The past few years have been a nightmare for Nucor with steel demand falling off the map. Nucor’s earnings have plummeted 30% over the past few years as the construction sector has grounded to a halt. Nucor saw its free cash flow turn negative and its earnings plummet. The company is currently paying out more via distributions ($1.44) than the company’s current earnings per share ($1.13).
There are signs that things are slowly improving in the steel sector. Nucor is currently operating at a 75% level and revenue is on pace to come in over $16 billion dollars this year. Nucor is seeing sequential growth in the automobile sector especially. Demand in the energy sector has been below average. Residential and nonresidential construction demand for steel products is still tepid.
The stock is not cheap right now with shares trading at 33 times this year’s earnings. The current dividend payout is 304% which is unsustainable without a significant increase in EPS. The company is relying heavily on earnings returning to normal in order to fund the dividend. Unless the economy picks up in a major way, Nucor will be forced to cut its dividend. The company cannot keep depleting its current assets to fund its dividends.
Investors should take a pass on Nucor. At $38 per share, the stock is trading at more than two times the company’s projected growth rate for shares. The stock may be a Cramer favorite but there are much cheaper opportunities in the steel sector.
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