Despite a 30%-plus price decline, Nucor (NUE 1.81%) stock is still kind of expensive, with a historically low dividend yield of 1.7% or so. Eventually that'll change, given the highly cyclical nature of the steel industry. But in the meantime, investors should take note that Nucor is making some significant investments -- and that's very good news.
What you do and when you do it
Anyone who has a leaning toward value investing will understand that it isn't just important to buy good companies; you also need to buy them when they are relatively cheap. Otherwise, you risk overpaying. Businesses tend to move forward along a sine curve, so this makes complete sense. For U.S. steel giant Nucor, however, the industry in which it operates is highly cyclical, so the ups and downs tend to be even more extreme, and -- to some extent -- predictable.
Here's the thing: Knowing that recessions will lead to industry downturns can really help you analyze what's going on during industry upturns. Over the past two years or so, Nucor has been operating amid a huge industry uptick, with record profits reported in 2021. The question to ask for long-term investors is: What is Nucor doing during the salad days?
The answer is that management is building its business via acquisition. For example, over the past four months alone, Nucor has acquired Summit Utility Structures, C.H.I. Overhead Doors, and Elite Storage Solutions.
What's the big deal?
The first important takeaway from these purchases is that Nucor is flooded with cash thanks to the strong steel market. And it is using that cash to invest for the future. Not only is the company putting money to work in its existing operations via its ongoing capital investment efforts, but it is also reaching outside of its current business to grow.
Oversimplifying things a little, here's a quick rundown of what's been done. Overhead Doors expands Nucor's structures segment into metal doors, allowing it to sell more to existing customers and grab market share in a sizable new business line. Elite Storage expands the company's racking business, which sells into warehouses and data centers. Both areas have seen strong growth. And Summit Utility Structures supports the company's plans to expand in the utility, telecom, and transportation sectors. All three are likely to benefit from increased infrastructure spending in the years ahead. Each of these businesses, meanwhile, uses commodity steel to create higher-margin products.
What's really going on is that Nucor is expanding into areas that are more profitable than selling plain old steel. Moreover, the more steel it uses internally, the less it has to worry about selling to outside customers. That's a win-win for investors, since some of the new businesses it is expanding into aren't as cyclical as the commodity-driven steel sector. That should help to moderate the company's ups and downs.
Meanwhile, they add to the list of steel niches in which Nucor can seek to gain a leadership position. Right now, for reference, it claims to be No. 1 or 2 in a dozen businesses. The more it moves in this direction, the less cyclical the company's earnings become and the more resilient its profit margin will be.
It's a process
Nucor likes to say that it is trying to create higher highs and higher lows, which is an acknowledgment that steel markets ebb and flow over time. That's probably never going to change no matter how much Nucor does to expand beyond commodity products. However, from an investor's standpoint, the moves it is making today during the good times speak volumes about management and why the stock will be well worth considering as a purchase during the next deep industry downturn. It's not there yet, but if there's a recession, Nucor could become a buy. The three acquisitions noted here are a key reason why.
