Nucor Corporation Generates Solid Results Despite Headwinds

With improved profitability in the steel sector, Nucor should continue to lead, especially if utilization picks up to any meaningful extent.

Feb 10, 2014 at 9:11AM

Despite an industry rife with low utilization and importers dumping steel, Nucor (NYSE:NUE) generated solid earnings for 2013. According to the company, the industry isn't going anywhere fast, but Nucor continues to be the profitable leader and offers a solid 3% dividend yield for investors who are willing to wait.

For the fourth quarter, the numbers produced by Nucor were generally flat to down sequentially while substantially higher than the comparable period in 2012. Revenue increased 10% to approximately $4.9 billion compared to about $4.4 billion the fourth quarter of 2012. Total revenue declined 1% sequentially from the third quarter. The good news is that consolidated net earnings increased from $0.43 in the fourth quarter of 2012 to $0.53 in 2013.

The full-year numbers are all the more impressive considering steel counterparts United States Steel (NYSE:X) and AK Steel Holding (NYSE:AKS) had large losses for the year. Both saw improved results for the fourth quarter, potentially signaling a rebound for the sector in 2014. Considering the last steel cyclical peak occurred during 2008, the sector is probably worth tracking for an eventual turnaround.

Capacity utilization
Within any industry, the amount of utilization of fixed assets such as plants is a major factor in profitability. A typical industry wants to achieve capacity rates of between 80% to 90% in normal cycles. Normally the goal is to manage utilization on normal volumes in order to provide some wiggle room to give top customers extra product during spikes in demand.

For steel producers, the operating rates of steel mills are crucial to profits. In the case of Nucor, the overall operating rate at steel mills during the fourth quarter was 75% with the full-year 2013 rate at 74%. The utilization rate has been consistent over the last couple of years in the mid-70% range. Despite consistently operating below ideal levels, Nucor continues to generate solid profits.

Interestingly, U.S. Steel is working at roughly 80% of capacity, though quarterly profits have been very inconsistent. Analysts have recently ratcheted up earnings expectations for 2014 to more than $1.70 from around $1 as recently as 90 days ago.

Likewise, after a strong fourth quarter for AK Steel, analysts have dramatically increased earnings expectations for 2014. The expectations for the full-year numbers have increased from $0.11 around 90 days ago to $0.40 now.

Suspending natural gas drilling
Previously, Nucor had partnered up with Encana to drill natural gas wells for a hedge against rising natural gas prices. Ironically, the company has decided to suspend drilling new wells due to the claims of depressed natural gas prices. A side benefit of suspending this plan is a $400 million reduction in capital expenditures for 2014.

By mid-2014, Nucor expects to have 300 wells producing enough natural gas to hedge the needs for the new DRI plant in Louisiana. The ironic part is that natural gas prices now sit at multi-year highs, at around $5 -- another prime example of why investors prefer corporations to focus on core competencies instead of branching out on side projects out of the realm of everyday operations.

Bottom line
With strong results from AK Steel and U.S. Steel confirming an improvement in profits for the sector, 2014 could finally be the year the steel sector turns around. Nucor remains a top pick in the sector due to its ability to generate strong profits, even during weak capacity-utilization periods. Also, investors get paid a 3% dividend yield to wait. The recent 10% plunge in the stock makes it attractive at these levels.

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Mark Holder has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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