We need steel to build bridges,wind farms and electric cars. With the $1.2 trillion Infrastructure Investment and Jobs Act of 2021 ramping up, alongside pent-up demand for durable goods such as autos as the economy recovers from COVID-19, Nucor (NUE -1.08%), the largest steel producer in the US, may stand the best chance to benefit from that need.
Image source: Getty Images.
Financial strength and room to grow
To meet that challenge, Nucor has been adding additional steel mills and increasing its production capacity. It added two start-up rebar mills in 2020 and has announced plans to build a new $350 million plant in Indiana. As a leader in the US economy's clean energy buildout, Nucor is launching a line of net zero carbon steel products and General Motors will be the first to use the product early this year. When you look at how much Nucor's spending to maintain or upgrade its facilities – its capital expenditures – as a percentage of its overall assets, you can see how Nucor's considerably outpacing its main competitor, Cleveland Cliffs (CLF -1.24%).
Data source: Bloomberg. Chart by author.
Nucor's low debt-to-equity ratio of 42% and strong free cash flow of $2.5 billion – the dollars generated from its operations, minus what it spends on ramping up its production – provides two distinct advantages over its competitors.
Data source: Bloomberg. Chart by author.
First, Nucor has the ability to borrow in order to ramp up production at lower interest rates than its more debt-laden competitors. Second, if the economy slumps, Nucor can pay back its debts out of its cash flow more quickly than its rivals. If all of Nucor's debt came due right now, the company's making enough cash to pay off those obligations in 2.2 years, compared to six years and eight months of payments for Cleveland Cliffs.
Inflation hasn't held Nucor back
The US is experiencing much higher-than-normal inflation, including a recent 7% year-over-year increase in the Consumer Price Index. Rolled steel prices have risen more than 240% since March 2020, though they have eased off recently. While Nucor's costs of making steel have also been rising, it has helped control its expenses through its ownership of DJ Joseph. The metal and recycling firm is the largest broker of steel and iron scrap in North America, giving Nucor cheaper raw materials from which to make new steel.
Overall, Nucor has significantly increased its top-line profitability. Its gross margins since March 2020 increased from 9.5% to 33%. While scrap prices increased over 80% through the third quarter of 2021, they were more than offset by the surge in rolled steel prices. Another factor driving profitability is Nucor's use of electric arc furnace technology, which is considered to be more efficient and environmentally friendly than the traditional blast furnace technology used by Cleveland Cliffs and most non-US steelmakers.
Investors, steel yourselves
Look through the market turbulence this year and keep an eye out for the buildout under the infrastructure bills and clean energy initiatives. If the Build Back Better (BBB) legislation passes, that will only increase the opportunity set for steel producers. Nucor is well positioned in its industry to thrive in this environment.
