Nucor (NUE -0.26%) is an industry-leading steelmaker, utilizing a vertically integrated business model. That means it has scrap-metal operations, makes commodity steel, and uses its own steel to create fabricated products. That last segment has been increasingly important to the company's success, and long-term investors need to understand just how valuable it is.
Nucor has an advantaged business model
The first thing to understand about the steel industry is that it is highly cyclical. Demand tends to ebb and flow along with economic cycles. Steel is a commodity, so the prices that Nucor fetches for its steel can be highly volatile, leading to material swings on the top and bottom lines.
Then there are the inputs into the steel process, which are also commodities (like scrap metal). So costs can be volatile, as well.
Image source: Getty Images.
That said, Nucor uses electric arc mini-mills, which are more flexible than older blast-furnace technology. Nucor's mills also make extensive use of scrap metal as an input, while blast furnaces primarily use iron ore.
To help control the costs there, the steelmaker has a large and diversified scrap-metal business. The company has plenty of competition in the electric arc mini-mill space, but the technology has been very resilient over time.
The best example of that is Nucor's status as a Dividend King. It's hard to create a record like that in any industry, let alone a highly cyclical one, so this steelmaker has clearly achieved a great deal of consistent success over time.
That brings the story back to Nucor's steel fabricating business.
The allure of high margins
As noted, Nucor has worked to control the costs it has to pay for key inputs. That's the scrap-metal business. But it has also worked to do more with the commodity steel it makes, which is the other side of the vertically integrated business model.
In some ways, you can look at this as Nucor being a customer for its own steel. This is a big deal.
In the second quarter of 2023, the raw materials division (scrap) accounted for 4% of revenue. The commodity steel business was 51% of earnings. And the rest, a huge 45% of revenue, was attributable to the fabricating operation.
This division takes commodity steel and turns it into things like warehouse doors, building parts, and racking systems. What's most notable here, however, is the profitability of the business.
Let's have a look at some numbers. Earnings before taxes per ton of steel totaled $235 in the second quarter of 2023. That was down from $437 per ton in the year-ago period, showing how volatile commodity steel can be at times. The fabricating operation, meanwhile, posted earnings before taxes per ton of $847, down from $862.
Not only are steel products way more profitable, but they tend to be more consistently profitable, as well. (For reference, earnings before taxes in the raw materials segment was $138, down from $264, highlighting that this division can be just as volatile as the commodity steel segment.)
NUE Dividend Yield data by YCharts.
The high margins and more consistent nature of the fabricating business is basically why Nucor has been highly focused on growing this division. Built largely through acquisitions, this business now has over 100 fabricating centers across North America.
The company has a huge position in non-residential construction. Demand is expected to be strong in the years ahead, as well, as companies work to build new factories in the United States to take advantage of government subsidies and strengthen supply chains. Nucor is positioning itself well to benefit from these trends.
Is Nucor stock a buy?
The problem with Nucor is that investors are keenly aware of its long-term success, so the shares rarely go on sale. In fact, earnings in the second quarter, while down year over year, were still quite lofty by historical standards. Today the yield is around 1.2%, which is toward the low end of the stock's historical yield range.
Nucor stock is probably not a great deal today, but given the cyclical nature of the steel industry, the stock does offer bargain opportunities every so often. It's definitely worth putting this industry-leading steelmaker on your wish list, looking for a dividend yield of around 3%. This would be an attractive entry point.
