In the first quarter, Nucor's (NUE -1.08%) revenue increased 12%, and earnings per share increased 35%. The stock traded down slightly on the announcement, largely a function of weaker-than-expected guidance for next quarter. Setting aside that concern, this was a solid quarter for Nucor.
1. Operational results are encouraging
Nucor's operations can be measured by the amount of steel produced and shipped, the prices it receives for its steel, the cost of inputs, and its ability to utilize its steel mills. On most of those measures, Nucor reported strong results, despite a moribund steel industry.
Steel production and shipments, measured by the ton, increased 8% and 7%, respectively. Sales price per ton increased 3%. Not a huge increase, and it outpaced Nucor's scrap costs, which increased by 5%. But operating rates at Nucor's steel mills increased. Utilization this quarter was 75%, which is still low, but it's an improvement from 72% utilization a year ago. All together, pre-tax profits increased 11%.
2. Financial position remains very strong
Nucor has $4.4 billion in debt and $1.2 billion in cash. That might not seem impressive, but compared to other steel producers, Nucor's balance sheet is extremely strong. It is the only steel producer in North America that boasts an investment grade credit rating.
This financial strength has allowed the company to regularly pay quarterly dividends for 41 years, despite the cyclicality of the steel industry. The current yield is 2.8%.
It's also a significant competitive advantage, as it allows the company to make smart investments during industry downturns that will pay off during boom times. Here's how Nucor CFO James Frias explains it:
Our financial strength is a significant competitive advantage. It allows us to invest aggressively during downturns to grow our long-term earnings power, which is a strategic initiative of Nucor. During the steel industry's current lengthy downturn, Nucor has invested in a broad range of strategic investments... With these investments, we are extremely well positioned to capitalize on the inevitable steel industry's cyclical upturn.
3. Foreign competition is still a big problem
In 2009, the U.S. imported 25% of its steel. By 2013, this had increased to 30%, and year to date, 36% of steel has come from foreign sources. Nucor CEO John Ferriola describes this trend as "alarming," and he lays a big portion of the blame on foreign governments that subsidize their steel industries. Here's what he said on the conference call:
Global steel production overcapacity is the greatest threat to Nucor and to our industry. Illegal government subsidies from China and other countries have allowed large amounts of cost-inefficient capacity to stay in production and dump steel into the global marketplace.
Foolish bottom line
My perspective on Nucor hasn't changed much from last quarter. While the steel industry remains far from its cyclical peak, Nucor is a tremendously well-run company. It's got a great culture, solid managers, and a strong balance sheet, and the company is investing for better times. I don't know when the steel cycle will turn, but I admire Nucor's ability to continue to perform in tough times while paying investors a nice dividend to wait for things to get better.
