Steel is capable of retaining its strength under extreme conditions and withstanding immense physical forces. U.S. steelmaker Nucor (NYSE: NUE) continues to display similar properties -- retaining strength through all stages of an extreme business cycle, and refusing to buckle under the pressure.
Nucor produced a second-quarter earnings performance that would have to be deemed a success under the best of barely post-recessionary conditions. When viewed within the context of a sharp downturn in domestic growth momentum and the very real shock waves that shot through the industry in the aftermath of the tsunami in Japan, I consider Nucor's defiant 229% increase in net profit over the prior-year period a truly remarkable achievement.
An overdue surge in pricing strength may have spared the entire industry from feeling the full impact of rising input costs, supply-chain disruptions, reduced capacity utilization, and other operational challenges. Nucor's consolidated sales volume grew only 1% over the prior year period, but the company's realized sales price per ton surged by 21%. Accordingly, sales revenue expanded 22% to $5.1 billion, while net earnings skyrocketed 229% to nearly $300 million.
If those impressive year-over-year results obscure the reality of a palpable loss of momentum within an already frail hint of a domestic industrial recovery, a sequential comparison with some first-quarter metrics may offer a relevant perspective. Nucor's capacity utilization tumbled all the way from 80% in the first quarter to 71% for the second quarter. Total tons shipped fell 6%. As GDP growth recoiled from rosier prior forecasts to dip below 2%, that reality is reflected in the operations of steelmakers.
When evaluating Nucor as a potential investment, I offer an important point to consider. First, while some may consider Nucor's exposure to construction-related demand an insurmountable red flag, I would counter that Nucor enjoys well-balanced exposure to a range of end-user markets. Indeed, CEO Dan DiMicco is "very perplexed by how some financial market participants are so quick to claim that Nucor will underperform its steel industry peers" because of "our company's heavy participation in construction markets." As the wheels fell off the American industrial machine in 2008, exposure to construction-related demand did negatively affect the relative outlook for Terex (NYSE: TEX), in contrast to mining-heavy manufacturers Bucyrus -- acquired by Caterpillar (NYSE: CAT) -- and Joy Global (Nasdaq: JOYG). But Terex has ultimately landed on its feet, and likewise, Nucor will not bend. Meanwhile, recognizing the strong growth in global demand for heavy equipment for mining and other industries, Nucor's plate mills in the second quarter "capitalized on both improved pricing and solid demand from a number of sectors, including heavy equipment, truck trailers, energy, mining and rail, and our recent product expansion to heat treat plate."
Adaptation and flexibility are time-tested keys to long-term success, and Nucor exhibits those qualities in spades. That is why I believe that although Nucor may bend or sway with the changing face of demand for steel products, it will hold its strength and never buckle. Although I prefer targeting the top of the steel supply chain through miners of steelmaking raw materials such as Peabody Energy (NYSE: BTU) and Cliffs Natural Resources (NYSE: CLF), I consider Nucor a very stable candidate for a long-term-oriented investment portfolio.
- Add Nucor to My Watchlist.
- Add Terex to My Watchlist.
- Add Caterpillar to My Watchlist.
- Add Peabody Energy to My Watchlist.
- Add Cliffs Natural Resources to My Watchlist.
