Is The Steel Industry Beginning to Shine?

Nucor Steel (NYSE: NUE  ) posted relatively strong third quarter earnings when compared sequentially to the first and second quarters. Although there were notable positives trends, company specific issues and seasonality are likely to lead to lower fourth quarter results. That will cap what has been a relatively difficult year for a company readying itself for the next upturn.

Opportunistic
Nucor earned $0.46 a share in the third quarter, up from $0.26 in the first quarter and $0.27 in the second. The sequential jump is impressive and keeps earnings moving in the right direction. The only problem is that outages at competitors like AK Steel (NYSE: AKS  ) and U.S. Steel (NYSE: X  ) provided a notable boost to third quarter results.

For example, there was a mechanical failure at AK Steel's Middletown Ohio Works in late June. That incident is expected to cost AK at least $0.09 a share in the third quarter with the potential for additional costs flowing into the fourth quarter. U.S. Steel, meanwhile, has had to deal with a blast furnace outage at its Great Lakes Works and a labor dispute. It noted that "shipments are projected to decrease significantly" in its second quarter earnings release.

In addition to benefiting from its competitors' problems, the company also saw inventory restocking by its customers. These largely temporary trends won't be as helpful in the fourth quarter, which also tends to be a seasonally weak sales period.

To make matters worse, Nucor will be shutting three of its own steel mills in the fourth quarter. Although these planned outages are to accommodate expansion projects, which is good longer term, they will clearly be a drag on fourth quarter results. As such, management is warning investors to prepare for sequentially weak earnings the next time it reports.

Covering the weakness
The solid third quarter is also masking what is still a weak steel market. For example, year to date Nucor earned $0.99 a share, down from $1.15 in 2012. And the average sales price per ton was down 4% year over year in the third quarter. So while things may be getting better, there's still underlying weakness in the steel industry.

In fact, during the company's conference call, it noted that "economic and steel market conditions remain challenging." Although the company pointed to several positive trends, it also highlighted such problems as low industry utilization rates and high import levels.

That said, the company has been a standout performer, remaining profitable throughout the year. For comparison, ArcelorMittal (NYSE: MT  ) , the industry's largest player with an around 8% market share, has been bleeding red ink since the third quarter of last year. Although ArcelorMittal believes the low point of the current cycle is past, the steel giant still has a long way to go before it starts making money again.

Using the downturn
More importantly, Nucor remains a well financed company with an astute long-term plan. For example, long-term debt to total capital is a reasonable 36% or so of the capital structure, and it has almost $1.8 billion in cash and investments on the balance sheet. In addition, it has a completely untapped $1.5 billion credit facility at its disposal should it need more liquidity.

And, despite the difficult market, Nucor has invested around $8 billion in its business since 2008. Most recently, it has been focusing on reducing costs, particularly for raw materials, and adding more value added products. These types of products tend to have higher margins and will hopefully hold up better than commodity type products during the next downturn.

Waiting for the upturn
Nucor is a well run steel maker operating in a tough market. That's not going to change overnight. In fact, company-specific issues will lead to a sequentially weak quarter to end the year. But, despite the headwinds, the company continues to position itself well for long-term success.  

The world's most precious resource
Interested in natural resources? Then you owe it to yourself to discover the most precious resource in the history of the world. It’s not gold. Or even oil. But it’s more valuable than both of them. Combined. And here’s the crazy part: one emerging company already has the market cornered… and stands to make in-the-know investors boatloads of cash. We reveal all in our special 100% FREE report The 21st Century's Most Precious Natural Resource. Just click here for instant access!


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2689324, ~/Articles/ArticleHandler.aspx, 8/20/2014 7:42:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement