Nucor (NUE 1.81%) is the largest steelmaker in North America. It is a bellwether for the domestic market and perhaps one of the best-run names in the industry globally. So digging in and understanding what's driving Nucor's results is not only informative about Nucor, but also about steelmakers more broadly. The company's first quarter was a record-setter, but it wasn't exactly a perfect quarter. Here's what you need to know.
What a number!
Nucor's first-quarter 2022 net income totaled $2.1 billion, more than double the $942 million it reported in the first quarter of 2021. Earnings per share came in at a hefty $7.67, up from $3.10. It was the company's most profitable first quarter ever.
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And yet, if you look at sequential results, there's a slightly different picture. In the fourth quarter of 2021, Nucor's net income totaled $2.25 billion. Earnings per share came in at $7.97 per share. Those were record results as well, but they were sequentially higher from the third quarter of 2021. First quarter 2022's earnings were down sequentially.
This is important because steel is a highly cyclical industry, prone to dramatic ups and downs. When times are good investors tend to flood into stocks like Nucor, bidding their shares up and making them expensive. That's the case right now, with its stock up near all-time highs and its dividend yield down at the low end of its historical range. Now is not the time for most investors, particularly those with a value bias, to be adding Nucor to their portfolios. And investors who are trying to time the ups and downs of the industry will want to keep close track of what's happening behind the headlines to make sure they don't get caught off guard.
The fly in the ointment
The big troubling takeaway from the first quarter of 2022 is that sales were up a scant 1% from the fourth quarter of 2021, even though they were up around 50% from the year-ago period. Going a bit deeper, the average sales price per ton in the first quarter was 2% higher than it was in the fourth quarter but a massive 68% higher than it was in the year-ago quarter.
And then there's volume. Nucor sold roughly as much steel in the first quarter as it did in the fourth quarter, but 11% less than it sold in the first quarter of 2021. There's a couple of takeaways here.
First, inflation is clearly impacting the company's results right now. That's shown by the sequential earnings drop despite slightly higher selling prices and roughly similar volumes compared to the fourth quarter. Investors need to keep an eye on this trend.
Then there's the issue of volume, which was off notably year over year. In fact, the only thing that allowed Nucor to post record results was the huge increase in steel prices. That's well and good, but steel is a commodity and cyclical. The volume issue is a worry that should also be closely watched, as it could be an indication of a weakening steel market.
To be fair, Nucor is reporting that demand remains robust overall and that the second quarter is likely to see another record. Thereafter, however, year-over-year comparisons are going to start getting a lot more difficult. And if volumes and/or steel prices begin to retreat, Nucor will have a hard time living up to the massive expectations that appear to be priced into its shares.
Watch and wait
For conservative investors looking to own a steel company, Nucor is probably the best overall option. But you can't simply buy it at any price. Right now, with the company posting record results, most should probably be watching from the sidelines. Given the inherent volatility of the industry and the volume and steel price trends, there's a chance that Nucor's performance is on the cusp of turning a corner in a less-than-desirable way. If you are patient, you might soon have an opportunity to buy this well-run steel mill at much cheaper prices.
