Another quarter, and steelmaker extraordinaire Nucor Corporation (NYSE:NUE) continues to operate in a tough market. Fourth-quarter earnings per share of $0.65 beat analyst expectations, but revenue came in light -- $5 billion in sales, about $300 million below the average analyst estimate. For the full year, sales increased more than $2 billion, while earnings per share increased 45%, to $2.22.
The quarter was mixed, but the full year did show some improvement. Let's take a closer look at three parts of Nucor's business. While the improving American economy does provide some potential tailwinds, there are some areas that investors need to be keenly aware of. Let's take a closer look.
Cheap oil bad for business
The big financial story of 2014 was the collapse of oil prices. And while that $2 (or less) price at the pump is great, Nucor and other American steelmakers will feel the impact in a bad way: reduced demand for tube steel and pipe. Over the past three years, North America has added some 3 million daily barrels of oil to the global supply, while global demand has grown at a slower pace. The most likely outcome is that at some point in 2015, domestic production will begin to level off, and because of the nature of shale oil production -- which requires lots of new wells to grow volume -- demand from the energy market will likely decline.
So what had been seen as a great source of sustained growth for Nucor now looks much less certain, at least in the interim. It's not clear exactly how -- or how much -- Nucor will be affected, but there will be some impact.
DRI plant in Louisiana still down
Nucor's plant that had been producing direct-reduced iron, or DRI, using natural gas as a primary feedstock, has been out of operation since early November. The good news is the outage isn't due to failure of Nucor's DRI technology, but a more standardized piece of industrial equipment. The bad news? Management says it will be "late in the first quarter" before the plant is operational again.
This isn't the first time the DRI plant has been a major financial drag on the company. In 2013, the collapse of several storage domes at the same facility led to millions in writedowns and production losses. In short, another source of expected strength has been a drag on the company's results. The prior plan had been to gradually ramp up production at the DRI facility in 2015. It looks like it could be closer to the middle of 2016 before production is at levels the company has been expecting.
The biggest loss of all might be time. CEO John Ferriola has said that Nucor's biggest advantage with its DRI facility is probably the time advantage of several years in the market, and operating this facility. Every production delay eats away from that time advantage.
A strong economy good for business; imports remain a challenge
From the earnings release:
We do expect improvement in energy demand once inventory destocking is complete. Additionally, from a long-term macroeconomic perspective, we believe lower energy prices are good for the domestic economy and therefore good for Nucor. Import levels have continued to increase in 2015, and we expect imports to remain at high levels throughout the first quarter. ... We continue to see positive trends in nonresidential construction markets which should benefit our steel mills and fabricated construction products businesses as the year progresses.
Imports and weak oil prices are the two big unknowns right now. Nonresidential construction has remained weak since the beginning of the recession, and if this market -- which is enormous -- really does begin to turn, then this bodes very well for Nucor. Furthermore, it looks like Nucor management sees the benefits of low oil prices as a net benefit, even if it does cause some short-term pains for the company.
The reality is, Nucor is unlikely ever to operate in a perfect environment. There will almost always be weakness in at least one of the industries that the company sells to. While nonresidential construction has been poor for years, domestic energy has been a boon, as has the recovery of domestic auto manufacturing.
Furthermore, the company kept its 40-plus-year streak of dividend increases alive, though with another paltry increase of less than 1%. However, with the market remaining somewhat uncertain, Nucor's moves to strengthen its business, like the recent Gallatin Steel acquisition, are probably a better use of capital right now. They should result in a company more capable of bigger dividend increases in future years, as these acquisitions increase the company's earnings.