Nucor (NUE +0.33%) is one of the largest steel companies in the United States. That fact alone, however, doesn't make it worth buying, since there are plenty of once-giant companies on the dust heap of Wall Street history. Here are six key reasons why Nucor is not just a giant steel company, but also one of the best you can buy.
1. Modern mills
The starting point for Nucor is that it uses electric arc steel mills. These are more flexible than older blast furnace technology mills, which require high operating rates to turn a profit. It's a simplification, but Nucor can ramp its mills up and down more easily, and thus quickly adjust to market conditions. In addition, electric arc mills tend to be smaller than blast furnaces and, as a result, can often be located closer to the markets they serve. This helps to reduce the cost of transporting heavy steel products from the mill to the end market, offering a cost advantage to Nucor. There's a lot of nuance here, but the end result is that using modern electric arc mills gives Nucor a leg up in the North American market.
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2. Vertically integrated
In addition to being more flexible, electric arc mills also make use of scrap metal. That can help to keep costs down when iron ore prices are high. Nucor, meanwhile, has worked to ensure its access to this key input, and owns one of the largest scrap metal companies in the United States. That helps keep costs low, and input predictability high.
On the other side of the equation, Nucor also has a significant metal fabricating business. Essentially, it takes the commodity metals it produces and turns them into higher-margin products. This helps to increase margins, and ensures a ready customer for its production. Being vertically integrated doesn't guarantee success, but it does provide added consistency to its business.
3. Diversification
Another key business focus for Nucor is to operate in a large number of different industry segments so a downturn in any one area won't derail the overall company. It also attempts to be a leader in the markets it serves as well, holding the number-one or -two spot in 11 different segments of the steel industry. Thus it is both large and diversified at the same time. As an investor, you know that diversification is good for your portfolio -- well, it's also good for a company's business.
4. Financially strong
All this speaks to a company that is conservative by nature, which flows through to Nucor's balance sheet. Its debt to equity ratio is among the lowest in its peer group, and its interest coverage is among the highest in the industry. Having such a strong financial position gives Nucor the ability to survive downturns with relative ease. But more importantly, it gives the company the flexibility to opportunistically invest in down markets so it can come out the other side a stronger competitor. In fact, it's doing just that today, with several large projects underway right now, despite the economic impact of COVID-19 and the recession that started in February.
NUE Debt to Equity Ratio data by YCharts
5. Employees on board
In addition to all of these core operational benefits, Nucor also has a highly dedicated set of employees. A big part of that is the company's use of profit sharing. When times are good in the steel industry, Nucor's staff has a chance to share in the success and earn above industry pay by hitting pre-set production goals. This is important for Nucor, because happy employees stick around and work hard to hit their goals. However, in exchange for getting paid more when times are good, its employees are willing to get paid less when times are bad. This, too, is important for Nucor because it gets a break on one of its biggest expenses just when it needs some extra financial breathing room -- during industry downturns.
6. Showing investors the money
The first five reasons here are all about how Nucor conducts its business, which is the core of any company. And even alone, they would make Nucor worth buying.
But there's one more thing to consider as an investor: Nucor has increased its dividend for an incredible 47 years and counting. That should catch the attention of most dividend investors, particularly when you note that steel is a highly cyclical industry. Nucor has clearly shown that returning cash to shareholders is a very important part of what it does, and it knows how to ensure that it keeps doing just that through the good and bad steel markets.
Is now the time?
That brings us all the way to the final call here. Nucor is a great steel company, perhaps one of the best in the entire world. At the right price it would make a fabulous addition to just about any portfolio. Using the dividend yield, which currently sits at around 3.5%, as a rough gauge for valuation, Nucor's stock looks reasonably attractive. That yield is toward the high-end of its recent range, but not the highest it has been. So if you want a good company at a fair price, Nucor looks worthwhile right now.
That said, if you are a deep value investor, then you'll probably want to put this one on your wish list. As a cyclical company, Nucor's shares tend to get hit particularly hard when recessionary fears are highest (the yield spiked above 5% in early 2020 when COVID-19 pushed the U.S. into a recession). The problem, of course, is that buying when fear is at a peak can be hard to do. That said, if you go in knowing a little bit about Nucor, including the six points above, you'll be better prepared to act on this wish list name when the time is right.
