Steel company Nucor (NUE -8.87%) had a terrific earnings day last week, as reports of a big earnings beat eclipsed news of a revenue miss, sending Nucor stock up 5.5% in a single day. In the days since earnings came out, however, Nucor has given back almost all of its gains. Closing just under $148 a share Tuesday, the stock is now up less than 1% from its pre-earnings price.
So who was right? The investors who bought Nucor stock hand over fist last Thursday, or the folks who've been selling it ever since?
Nucor by the numbers
Nucor's Q1 2023 numbers were both worse than expected and better than feared. On the "worse" side of the equation, quarterly sales came in at $8.7 billion, which was both 3% short of analyst predictions and 17% below Q1 2022 sales, despite steel volumes shipped growing 4% year over year.
Earnings, on the other hand, came in at $4.45 for the quarter. While that was down a staggering 42% in comparison to last year's Q1, it was at least better than Wall Street's prediction that Nucor would earn only $3.81 per share in quarterly profit.
Commenting on the results, Nucor CEO Leon Topalian called the results "very strong" despite the earnings decline, and explained the rise in steel shipments as "driven by...increased demand for steel at our mills." And I suppose that's true if you are comparing Q1 2023 results to those of the preceding quarter, inasmuch as "steel mill utilization rates and profit margins were both up in the first quarter compared to the fourth quarter."
It's when you compare apples to apples -- Q1 2023 numbers to Q1 2022 numbers -- that the "very strong" characterization starts to look a bit iffy.
It's also worth pointing out that the improvement relative to Q4 2022 appears to have legs, with the CEO predicting that 2023 will be "another very profitable year for Nucor." Citing expected improvement in profit margins at the company's sheet steel mills in particular (sheet steel is Nucor's biggest business, and shipments there grew strongest for Nucor year over year), Topalian said he expects earnings to continue improving in Q2, relative to Q1.
It's what happens afterwards that should perhaps concern investors more.
What the analysts say
Consider: 2022 was by a large margin Nucor's most successful fiscal year ever. As prices for produced steel surged, the company earned $28.79 per share -- 24% better than in 2021 (which was itself a pretty fabulous year), and nearly seven times more money than Nucor earned in pre-pandemic 2019.
As for this current year, most analysts who follow the steel industry agree with Topalian that 2023 will indeed be "another very profitable year for Nucor." Average estimates predict a $16.25 profit by the end of this year, nearly four times more than Nucor earned in 2019. The problem is, $16.25 per share would also be a 44% drop from what Nucor earned last year.
That's enough of a drop to turn Nucor from a 6.1 P/E stock into a 9.2 P/E stock -- still not "expensive," per se, but 50% more expensive than how the stock looks today. And the farther out you look, the worse the valuation gets.
In 2024, for example, analysts forecast a 31% drop in Nucor earnings to $11.25 per share, pushing the forward P/E up to 13.2 times earnings. As earnings continue to slide into 2025 (down another 12% to $9.86, assuming the analysts are right), the P/E will take another jump to more than 15 times earnings.
Again, that's a relative bargain with the S&P 500 trading at 17.2 times 2025 projected earnings right now. But it's not a very big relative bargain, especially given that the S&P 500 as a whole is expected to be growing its earnings, whereas Nucor is expected to be shrinking its earnings. (As a general rule, investors are more willing to pay a high P/E for companies -- or groups of companies like the S&P -- that are growing earnings rather than shrinking them).
So what's the upshot for investors in Nucor?
The cyclical steel industry appears to have hit its cyclical peak in 2022, and now that steel prices are turning over, they're taking Nucor's profits down with them. Nucor management is still insisting that things will get better, not worse, over the next quarter or two, and that earnings will look terrific this year, even if perhaps not quite as terrific as last year. If that's the way things play out -- well and good. It will mean the analysts are wrong (which has been known to happen from time to time).
But do keep an eye on Nucor's guidance over the coming quarters. If what management starts saying begins sounding like what analysts are already saying about profits, it may be time to find a different stock to invest in.
