This Steel Giant Is Making a $2 Billion Investment in the Future

U.S. steel giant Nucor Corporation (NUE -2.21%) has been running the same highly successful playbook for a very long time. Right now, that playbook calls for at least $2 billion in capital spending between 2018 and 2019. Here's what management has in the works, and how past moves are powering today's decisions.

From the ground up

During Nucor's third-quarter conference call, CEO John Ferriola explained that the steel company has two primary uses for cash. The first is to invest in profitable growth, and the second -- if there aren't enough opportunities for profitable investment -- is to return it to shareholders. That's a pretty simple concept, and there's a lot that goes into those decisions. But it explains a great deal about what's going on right now.   

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Nucor has nine projects in the works, worth around $2.2 billion. Scheduled completion dates span from 2019 to 2021. All of the projects are either upgrades of existing assets or new mills.   

Some highlights include the rebar mills Nucor is building in Florida and Missouri. The goal is to provide product to a pair of markets that are currently served by mills outside of these areas. That will give Nucor a competitive advantage because transportation costs for its rebar will be lower. It also has notable scrap-collection assets around both mills, which will help to keep costs low. 

In addition, it is upgrading a rolling mill at its Marion facility in Ohio and expanding its Kankakee mill in Illinois. The Ohio upgrade is expected to help reduce operating costs, enhancing the company's competitive position. The Illinois expansion will allow Nucor to take share from competitors that are shipping rebar in from outside the region. It takes advantage of both excess melting capacity at the mill as well as the company's scrap operations in the area.     

The steelmaker's Gallatin mill in Kentucky is scheduled for two projects. The first, expected to be completed in early 2019, will allow Nucor to produce wider sheet products. The industry-leading mill will support greater sales into the automotive sector. In 2021, the company should complete an expansion that will nearly double the mill's production to support growth in automotive markets, tubular steel/pipe (for the energy industry), and the heavy equipment and agriculture sectors. These are all higher margin products that move Nucor up the value chain.   

Nucor is also working with 50/50 partner JFE in Mexico to build a new mill. This investment expands the company's reach beyond the United States and is meant to serve the growing auto industry in that country. The mill should start up in 2019.

There are a couple of additional projects, but you get the idea. Nucor is strategically building assets that allow it to better serve customers and/or move up the value chain to increase production of higher margin products.

A change, but not a big one

One of the key takeaways from the examples above (the complete list is below) is that Nucor isn't buying assets. The steel industry is in the midst of an upturn and, as Ferriola noted during the quarterly conference call: "...in strong markets, sellers are proud of their assets and they value them accordingly. That's why when you look at our history, we historically grow organically during the stronger markets."    

Data source: Nucor Corporation.    

That wasn't true just a couple of years ago, when Nucor made three acquisitions in the tubular-steel space to build a new division. The new tubular steel division, meanwhile, has allowed the steelmaker to use more of its commodity steel internally to produce higher margin products. This is a long-term goal for Nucor, which increased its internal use of steel from 8% of production in 2006 to 16% in 2016. The tubular steel division, built with acquisitions between late 2016 and early 2017, helped increase that to 19% last year.   

But the real proof of the company's approach is that its financial results over time have generally followed an upward path. The steel industry is highly cyclical, of course, so the goal is to create a business that can produce higher highs and higher lows over time. For example, during the 2001-to-2003 downturn, Nucor's average annual cash flow was $495 million. The average during the most recent downturn, which ran from 2009 to 2017, was $1.3 billion. With the industry now in a decided upturn, Nucor is producing record results.   

If you are looking for a steelmaker...

The projects in the works show that Nucor is finding plenty of ways to use cash to continue profitably growing the business for shareholders. That cash, meanwhile, is available because of past investments, a virtuous cycle that investors should be pleased to see. Nucor isn't cheap today, as you would expect based on the industry upturn, but if you are looking to add a steel mill to your portfolio, it should be on your short list.

If you like this story, but don't want to buy during an upturn, then put Nucor on your wish list -- the next cyclical downturn could provide an opportunity to buy this well-run industry giant at a good price.