Nucor (NUE -0.89%) has a strong business model, underpinned by cost-effective steel production and a diversified product lineup. But the real story is the logic that acts as the foundation for everything the company does. In sum, it wants to be the cheapest and best provider to its customers. Here's how it is doing that today, by acquiring its way into the rack business.
We're No. 1
Nucor happily boasts that it has the No. 1 or 2 position in 12 steel industry segments. This isn't some lucky coincidence; being an industry leader is a stated company goal. A good example of this happened in 2016, when Nucor bought its way into the hollow structural section steel tubing space, which generally goes by acronym HSS in the industry.
In September 2016, Nucor agreed to buy Independence Tube Corporation for $435 million. At the time, Independence Tube had a No. 2 industry position in HSS, meaning that Nucor instantly added robust market share in an end market that was effectively new to it. It then followed up that buy in December 2016 with an agreement to buy Southland Tube for $130 million, cementing its No. 2 slot. It remains the No. 2 player in the HSS space today.
One of the key features of this investment, however, was that HSS products use sheet steel. At the time, this pair of acquisitions was expected to increase the internal use of sheet steel from 8% to 20%. This is worthwhile because Nucor is effectively taking a commodity product (sheet steel) and turning it into higher-margin products (HSS). Increasing the company's exposure to higher-margin products is another key goal.
Getting into rack
Nucor is always looking for ways to improve its business in the cyclical steel industry. So there are frequent portfolio moves here. But two recent acquisitions are highly reminiscent of the HSS effort. In July 2021 Nucor agreed to buy Hannibal Industries for $370 million. It followed that up in April 2022 with the purchase of Elite Storage Solutions for $75 million.
Racking products are used in a variety of businesses, from warehouses to data centers. The company's racking systems are made from sheet steel and bar steel (among others), again allowing Nucor to produce higher-margin products from the commodity steel it produces. And, racking dovetails very nicely with the company's metal building systems products, which are used to build outer structures. So now, Nucor can provide a complete solution from the roof and walls all the way to the internal racks.
Management expects warehouses and data centers to see ongoing demand for new construction, and sees this as a growth business. That isn't surprising given the trends in online shopping and the technology that supports it. The two purchases, meanwhile, help to build out the company's geographic reach, as each served different areas of the country. That's another core goal for Nucor, which attempts to keep transportation costs low by locating its production facilities close to customers.
The big deal is the logic
At the end of the day, building a racking business isn't going to be a game-changer for Nucor. But it does add to the collection of non-commodity businesses that it can use to power its long-term growth. And that's the real takeaway here. Nucor is once again looking to build a business that will help it reward investors by adding extra value to the commodity products it produces. While no product line in this process is likely to be massive, each one is a building block to a better future.
If you own Nucor you should keep an eye on the racking acquisitions, but what you really want to watch out for are more deals like this and the HSS purchases from 2016. One of the benefits of being the biggest and, likely, best-run steel mill in the United States is the ability to do bolt-on deals that further distance Nucor from its peers.