North American steel giant Nucor (NUE 0.44%) has a goal: Financially speaking, it wants to produce higher highs as well as higher lows. That might sound a little like double speak -- but it isn't.
In fact, these goals force the company to take a long-term, growth-oriented approach with its business that has served customers and investors well for decades. And it's why the biggest news out of the third-quarter earnings report wasn't necessarily the company's record-setting financial results.
Giving the company some kudos
Before getting too deep into this, Nucor deserves some credit for its recent financial results. The third quarter of 2021 (which ended Oct. 2) came with record quarterly earnings of $2.13 billion, or $7.28 per share. That's more than the company earned in all of 2020 ($721.5 million, or $2.36 per share). Of course, that was the year of the pandemic-related economic closures, so perhaps it's not the best comparison. But it was also more than Nucor earned in all of 2019 ($1.27 billion, or $4.14 per share). In fact, the third quarter's tally was almost as large as the company's full-year record of $7.42 per share earned in 2018.
What's interesting is that the second quarter of 2021, with earnings of $1.51 billion, or $5.04 per share, was also better than 2020 and 2019 as well, though not quite as good as the third quarter. And management has suggested that the fourth quarter could be even better still. Needless to say, 2021 is going to be a record year for Nucor unless something incredibly bad happens over the next month or so.
All of these earnings records are great, but the really important takeaway is that this was no accident. Nucor worked hard to make this happen, and that's what investors need to focus on, given that the steel industry is highly cyclical. Sure, this industry upturn has been wonderful -- but it will eventually end. What won't end is the way management operates the business.
There are actually a number of things that set Nucor apart from its peer group. That includes the fact that it uses electric arc mini-mills, its rock-solid balance sheet, and its unique pay structure, which uses profit sharing to incentivize employee productivity. However, one of the most important things that should help this steel giant meet its goal of higher highs and higher lows is its ongoing focus on capital investment. Basically, it's always looking for the best way to put money to work so it can expand its business and achieve a leadership position in the markets it serves.
That's no small feat, given the company's $32 billion market cap. Still, by the end of 2021, it expects to have a $650 million expansion investment in Kentucky complete, and a $325 million galvanizing line installed in Arkansas. It's also working with General Motors to introduce a new line of environmentally friendly steel called Econiq that should start shipping in early 2022. Nucor hopes this new product will help it gain market share in the auto sector, among other areas. And these investments are on top of four projects completed in 2020, and another three in 2019.
The next big project was announced after the third quarter ended, adding a new line to a mill in Kentucky at a cost of $1.7 billion. That's expected to be up and running in late 2022. Beyond that is a brand new mill that's slated to be built in the Midwest (the exact location is still to be determined). The cost here is $2.7 billion, with a planned opening date of 2025.
In other words, there's a lot going on behind the headline numbers here. These long-term investments are what will help sustain the company's leadership position over time and allow it to gain share in markets where it wants to compete more effectively. And its historical results suggest that Nucor isn't looking to get bigger just for the sake of getting bigger -- this spending is truly making the company better. When the steel market turns lower, which will happen eventually, these investments are what you'll want to make sure you are watching.
Not now, but soon
Nucor's record results have not gone unnoticed on Wall Street, and the stock looks expensive today -- its 1.4% dividend yield is the lowest it has been in a decade. It's not a great time for investors to buy the stock. However, given the company's investments and goal of continually improving its performance in both good years and bad, long-term investors might want to keep the stock on their wish lists. When the steel industry heads lower, Nucor's stock will likely fall as investors throw the baby out with the bathwater. At that point, understanding the story behind the current earnings records will be incredibly valuable for investors.