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Nucor: Investing Through the 2020 Economic Downturn

By Reuben Gregg Brewer – Oct 3, 2020 at 9:22AM

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Nucor is spending today to ensure that its future is bright. Although the spending is vital, the key to this effort is found somewhere else.

It would be easy to argue that U.S. steel giant Nucor (NUE 0.44%) is one of the best-run steel companies on the planet. A 47-year streak of annual dividend increases in a highly cyclical industry offers some pretty solid proof. The company's penchant for investing in the future is also a big part of that success, but there's a component to consider that's equally important, if not even more so. 

Moving forward all the time

One of Nucor's core goals is to be a leader in all of the markets it serves. It currently lays claim to being the largest and most diversified U.S. steelmaker, with 25 mills capable of producing 27 million tons worth of steel a year. It has a No. 1 or No. 2 position in 11 industry segments, and it is the largest U.S. scrap metal recycler (scrap is a key steel input for Nucor's electric arc mini-mills). 

A steel worker in a foundry with molten steel pouring from a vessel

Image source: Getty Images

You don't build a portfolio like that overnight, it requires years of investment and a mindset that growth is a key long-term focus. Nucor's current plans are basically no different from its previous plans -- it's spending money to increase production (with a new mill in Kentucky), move up the value chain (with upgrades and expansions at various mills), and enhance its competitive position in key demand centers (with new mills in Missouri and Florida). To put some numbers on that, Nucor entered 2020 with $2 billion worth of capital spending plans. The pandemic put a damper on that, with the company pulling back to just $1.5 billion as the global health crisis started to unfold. But true to its long-term commitment to growth, management announced that it planned to increase that number to $1.7 billion during Nucor's second-quarter earnings conference call. Even in these troubling times, the steel giant is looking to keep building. 

The foundation

That's a wonderful tradition, and it's nice to see Nucor continue to run what has been a historically successful playbook. But there's a key ingredient that far too often gets glossed over, as investors tend to focus only on the plans for growth. That ingredient is Nucor's financial strength. Without a solid foundation, Nucor couldn't afford to spend all this money. And it certainly wouldn't take the risk of increasing its spending in the middle of a global pandemic if it didn't believe it could find the cash. So as you look at Nucor's growth-focused business model, don't forget to take a gander at its impressive financial strength.

For example, Nucor has a debt-to-equity ratio of roughly 0.5 times. That's lower than those of all of its major peers. And given the capital-intensive nature of the steel business, it is a fairly reasonable number. As a reference point, industry icon United States Steel (X 2.15%) has a debt-to-equity ratio of 1.5 times. Building off of that picture, Nucor covered its trailing interest expenses about 7.7 times over in the second quarter. Again, that's better than any of its peers, with runner-up Steel Dynamics (STLD 0.49%) at 6.9 times or so. (Note that Steel Dynamics is run by Nucor alumni, and might best be viewed as a baby Nucor.)

NUE Debt to Equity Ratio Chart

NUE Debt to Equity Ratio data by YCharts

Equally interesting, Nucor's current assets-to-liabilities ratio, which looks at a company's ability to pay its near-term bills, is nearly 4.4 times today. That's the best in the industry as well. Steel Dynamics is more frequently the top dog on this metric, but it's interesting to see that Nucor boosted its position here during the pandemic, while at the same time continuing to build for the future. That speaks to a company that can weather turbulent times in relative stride. 

The real source of greatness

You don't build a giant business like the one Nucor operates by accident -- it requires a constant commitment to growth. However, it's just as important to remember that growth only works out over the long term if a company has the financial foundation to support it. And Nucor's conservative approach to its balance sheet is what gives it the strength to keep investing in good markets and bad ones. If you want to know what truly differentiates Nucor from its peers, don't forget to include its impressive financial strength.

Reuben Gregg Brewer owns shares of Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Nucor Stock Quote
Nucor
NUE
$148.18 (0.44%) $0.65
United States Steel Stock Quote
United States Steel
X
$26.03 (2.15%) $0.55
Steel Dynamics Stock Quote
Steel Dynamics
STLD
$103.38 (0.49%) $0.50

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