Nucor Corporation (NUE 3.21%) has built an incredible streak in the highly cyclical steel industry -- it's increased its dividend every year for 45 consecutive years. That makes it a Dividend Aristocrat. A combination of factors led to this impressive achievement, including a well-run business, conservative finances, and a constant push for growth during good years and bad. The current industry upturn hasn't stopped it on the growth front, but it has shifted the priorities a little bit. Here's how Nucor is investing for the future today.
We're not telling
During Nucor's fourth-quarter 2017 earnings conference call, an analyst specifically asked about the steel company's expansion plans. CEO John Ferriola gave a totally non-committal answer that says more than it appears to.
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We take a look at what opportunities are in front of us and we evaluate them on an economic basis. If they happen to be upstream, so be it. If they are in our core businesses, so be it. If they're downstream, so be it. Frankly, if it's outside of our mainstream, and it provides a good economic return, we would take a hard look at it.
The key takeaway is that Nucor's management team is willing to invest where it makes economic sense to invest. During the deep steel industry downturn following the 2007 to 2009 recession that meant a mixture of capital investment in core operations and buying competitors. For example, Nucor took advantage of the downturn to build a tubular steel division via three acquisitions all inked in the fourth quarter of 2016. The oil industry, which was still dealing with its own downturn at the time, is a key customer in the tubular space. This was a particularly opportunistic move.
NUE Financial Debt to EBITDA (TTM) data by YCharts.
A key piece of Nucor's ability to make bold moves like this is its financial strength. For example, long-term debt makes up roughly 30% of the company's capital structure today. That's a modest level for any business, let alone a cyclical one like steel. Its debt to EBITDA ratio, meanwhile, is at the low end of its peer group, at just 1.6 times. And it ended 2017 with $1 billion in cash on its balance sheet and a $1.5 billion revolving credit facility that was completely undrawn. It has the ability to do just about any deal that makes sense, but what makes sense appears to be shifting a little bit.
Building from within
To be fair, Nucor agreed to buy two mills in 2017. These facilities augment existing assets in the auto space and a recent push into the Canadian market. Since the start of 2017, though, it has announced its intention to build four new steel mills and plans for the expansion of another mill. That's something of a flip from 2016, when its acquisition activity was notably higher.
All of the ground-up activity it's working on today was built around a strategic review of the company's mill footprint, with the goal of optimizing its ability to serve customers. In effect, the steel giant is building new facilities that are located near where it believes demand is strongest to eliminate the need to ship products from far-away locations. Nucor believes this will give it a logistic advantage over peers.
However, it also speaks to the flexibility of the company's growth goals and how they have shifted with the market. When the industry was struggling, Nucor was more willing to expand via acquisition, taking advantage of the downturn to pick up assets at bargain prices. At this point, the overall steel industry is starting to recover, with even financially weak competitors like United States Steel Corporation (X +0.00%) and AK Steel (AKS +0.00%) reporting notably improved financial results in 2017. Now Nucor is shifting gears and working to fine-tune the profile of its business from within.
NUE EBITDA (TTM) data by YCharts.
That makes complete sense, but it also comes with different dynamics. Nucor CFO Jim Frias summed it up nicely during the earnings call when he noted that, when it comes to acquisitions, "you're paying a higher premium for the EBIT because they are immediately accretive in terms of cash flow." Internal projects like the four new mills and one expansion currently in the works take longer to produce results since Nucor is actually going have to have to build things, which pushes out the timing of the cash they will ultimately generate.
The details matter
The takeaway from this is that Nucor's business will likely face a capital spending headwind over the next year or two as it builds all of these new facilities. It can handle the cost without any problem, but its financial results may look less positive then they did when the steel giant was buying immediately accretive assets and the steel industry was recovering from the downturn. However, that doesn't mean Nucor isn't growing its business -- it's just doing it in a different way. Notably, it's doing things the way that it, today, believes will provide the best return for its investors over the long term. The shares aren't particularly cheap at the moment, but if investors take a dim view of the inherent time lag over the short term, it could open up a buying opportunity for those with a long-term focus.
