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Last week I recommended and purchased shares of Nucor
One of the comments I received from a reader was simply that they preferred U.S. Steel
- The steel industry is very cyclical, and in uncertain economic times such as these, the price of steel is going to fluctuate wildly and could possibly be depressed for quite some time. Companies such as U.S. Steel are more highly leveraged to the price of steel because of their abnormally high fixed costs. In the most recent quarter, the CEO even stated himself that "results were also affected by higher facility repair and maintenance costs."
- Mini-mill operators such as Nucor and Steel Dynamics
(Nasdaq: STLD)have a significant advantage as they are able to adjust production schedules according to demand. They have more of a concentration on variable costs and can operate at a much lower breakeven point than companies like U.S. Steel. This gives Nucor an enormously competitive cost structure when compared with U.S. Steel.
- Third-quarter results seem to reflect my sentiment. While operating and market conditions were extremely difficult, Nucor managed to squeak out a profit and increase revenues, while U.S. Steel saw volume drop and reported a net loss of $0.35 per share.
Both Nucor and U.S. Steel are going to continue muddling through the rest of 2010 and could face a difficult 2011 as well, but I definitely feel that the uncertainty and bad news has been baked into their prices. Where Nucor shines, however, is on its balance sheet, its cost structure, and its history of returning value to shareholders through dividends and share buybacks.
If you're looking for a steel producer with more international exposure, check out Arcelor Mittal
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Jordan DiPietro owns no shares. The Fool owns shares of Nucor, which is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.