Steel giant Nucor Corporation (NUE 1.62%) recently reported its first-quarter 2018 numbers, and CEO John Ferriola has an important message to give to shareholders: "Nucor's disciplined strategy for profitable growth is working."
Ferriola has good reasons to be optimistic. 2017 was, after all, Nucor's most profitable year since 2009, and going by its first-quarter numbers, the momentum appears to have "carried over into 2018," as Ferriola iterated.
Could that mean Nucor is headed for its best years ahead? Where is the stock likely to be five years down the line?
A strong start to 2018
To be fair, Nucor wasn't the only steel manufacturer to deliver a stellar 2017. Pretty much like Nucor, United States Steel (X -2.27%) also delivered its best profits since 2009 last year. For Steel Dynamics (STLD 0.34%), 2017 was a banner year, with its steel shipments, net sales, and operating income hitting record highs.
Just days ago, Nucor reported a 9% year-over-year jump in its first-quarter sales and projected "significantly" higher sequential earnings for the second quarter. Clearly, stronger end markets, especially automotive, construction, and energy, have hugely improved the prospects for steelmakers in recent quarters. As the leader in the industry, Nucor is, unsurprisingly, benefiting from the upswing.
That's not to say Nucor is resting on its laurels. In fact, Nucor's strong earnings and cash flow streak since the Great Recession has little to do with its dominant position and more with internal efficiencies. Nucor's future could have a similar story to tell.
Nucor's growth strategy
Nucor has adopted a five-pronged strategy to "profitable growth" in the long term:
- Remain a low-cost producer.
- Become the market leader in every product line.
- Move up the value chain with a greater focus on higher-margin products.
- Expand downstream channels to market.
- Achieve commercial excellence, or in Nucor's own words, "become the supplier of choice."
Let me clarify that it's not a new policy framework. Nucor has been following this five-driver growth approach diligently for some years now, which might explain why the company has been able to withstand the test of times even as peers struggled.
To give you examples of points 3 and 4 above, Nucor's automotive shipments surged 62% between 2012 and 2017 as the company increased its focus on value-added products. The acquisition of several tube and pipe manufacturers last year not only expanded Nucor's value-added portfolio, it also gave its hot-rolled sheets a new "market" as the company's Tubular Group sources nearly 100% of its steel substrates from company-owned sheet mills.
Thanks to these moves, 20% of Nucor's steel now goes to its own divisions, up from only 8% in 2006. Nucor has also become the most diversified steel producer in North America, giving it an edge in a cyclical industry. So, while steel sheets make up the bulk of rivals' sales, Nucor derived only 35% sales from sheet in 2017. Bars, tubular products, plates, and structural products are other key contributors to its top line.
As for costs, Nucor is already better off than most peers thanks to its mini-mills that mainly use scrap to produce steel unlike companies like United States Steel, which use traditional blast furnaces for production.
The risks and challenges ahead
Improving end market conditions, lower taxes thanks to the new federal tax law, and an impending uptick in infrastructure spending in the U.S. are the biggest growth catalysts for Nucor. With cost-effective production methods and strong financials to boot -- a low debt-to-equity ratio of 37% and an unbeatable 45-year history of dividend increases are proof -- Nucor could be among the biggest beneficiaries of an upturn in the steel industry.
If there's one major deterrent to Nucor's growth, it could be steel imports. The U.S. markets have been a prime target for major steel producing-nations like China that have increased production rapidly in recent years and are dumping a big chunk of it into the U.S. at subsidized prices.
While the U.S. recently slapped tariffs on steel imports, China's retaliation and continued high steel production that's exacerbating the global supply glut could dent the prospects for domestic steelmakers. In fact, Financial Times estimates that a 1% increase in exports from China would "equal the entire export market for U.S. steel mills." As Ferriola candidly noted during Nucor's latest earnings call:
I'm confident that there's not going to be a shortage of steel in this country. There might be a shortage of dumped or illegally traded steel in the country, but there will not be a shortage of steel.
While the threats from China and steel imports are real, I'm still bullish about Nucor because its growth catalysts, as mentioned above, are the strongest the company has seen in several years.
Nucor's disciplined cost control and capital allocation policies should further help the company leverage any uptick in demand and prices of steel. Nucor's stock may still be volatile, but investors should still have earned decent returns five years from now when counting for Nucor's dividends.