Since earlier this year, shares of many steelmakers have been down by double digits over concerns that trade actions the Trump administration says it is planning to implement could actually backfire and hurt steel demand, causing more harm than good for the domestic steel industry. Among the country's biggest steelmakers, United States Steel Corporation (X -2.32%) has been one of the hardest-hit, with its stock price down 27% from its 2018 peak. Nucor Corporation (NUE -8.87%), on the other hand, has seen its stock fall by about 15%.
But don't think that makes U.S. Steel the better stock to buy today, because that's far from the case. The reality is, Nucor is far stronger financially and operationally, and should prove to be a far better long-term investment. Let's take a deeper look at why that's the case, and why you'd be far better off to invest in Nucor after the recent sell-off.
Nucor not only is lower-risk, but offers far-better reward potential for investors. Image source: Getty Images.
Better operations have meant better cash flows
Let's start with the most important difference between Nucor and U.S. Steel: operations. Nucor has established itself as a leader in efficient operations, routinely spending less on its expenses than U.S. Steel, even as its output and revenue have steadily grown much bigger than those of its competitor.
X revenue (TTM). Data by YCharts.
Of course, this chart doesn't tell the whole story, since a substantial portion of U.S. Steel's expenses in recent years were noncash items related to asset impairments and facility closures. But they are still very relevant, since those closures and impairments -- and the expenses related to them -- were a product of unprofitable operations that the company was forced to close. Yet even as U.S. Steel's operating expenses have fallen in more recent years, its output and revenues have also come well down from the peak. Nucor, however, generates substantially higher sales on a much smaller operating spend.
This only tells part of the story, since much of both company's manufacturing expense is reflected in its cost of goods sold and then carries through to gross margin. Let's compare Nucor and U.S. Steel on these metrics.
X revenue (TTM). Data by YCharts.
As you can see, Nucor's higher revenue translates to higher cost of goods sold. But its far more cost-effective steelmaking facilities, which use electric-arc mini-mills, give it a substantial advantage over U.S. Steel and its heavy reliance on blast furnaces. This is because mini-mills can operate profitably at a more variable range of output, while blast furnaces have much higher fixed operating costs, thus requiring higher utilization to run profitably. That is a key factor that translates to Nucor's higher gross margins as reflected in the table above.
Yes, it's true that U.S. Steel's blast furnaces can operate extremely profitably at very high output levels, but as recent history has proven, steel investors are far better off hedging to the -- very likely -- reality that steelmakers won't reach peak output very often.
Combined, Nucor's lower operating expenses and more efficient steelmaking facilities generate superior cash flows versus U.S. Steel, as shown below.
X cash from operations (annual). Data by YCharts.
Better at putting that money back to work
It's not just better operations and cash flows, either. It's better management (which conversely is a reason why Nucor's operations are more efficient). Nucor's executives, led by CEO John Ferriola, have proven to be excellent capital allocators, both when investing in expanding existing assets and making acquisitions. A good way to measure their effectiveness is with return on invested capital:
X return on invested capital (TTM). Data by YCharts.
Nucor has steadily generated much better returns on capital -- even as the domestic steel industry has struggled -- over the past decade. U.S. Steel, though, has seen many of its investments not only fail to produce decent returns, but actually produce substantial losses for the company and its investors.
History is likely to repeat itself
Going forward, there's little reason to expect U.S. Steel to suddenly become the better steel stock to own. It still relies on less-efficient production facilities, has a substantially weaker balance sheet, and is more likely to struggle during a steel downturn, while Nucor will likely keep operating profitably. Furthermore, Nucor's strong balance sheet and great capital allocators should be able to continue making opportunistic investments in growth during a downturn while U.S. Steel would probably have to idle or even shutter some of its facilities.
In the short term, concerns about tariffs and a trade war with China may be the big drivers behind the stock price for both companies. Over the next couple of years, steel demand and the overall state of the U.S. economy will fuel returns for investors. But looking at the long term, beyond what we cannot accurately forecast, and through multiple economic and steel demand cycles, Nucor stands as -- by far -- the best steel stock to own. U.S. Steel, meantime, is one that's best avoided.
