Steelmaker Nucor Corp. (NYSE:NUE) this morning reported a mixed bag of first-quarter financial results. However, much of that is out of the company's control, and more the product of the current market environment.
First, the highlights:
- Net earnings per share of $0.21, above analyst estimates but down 40% from last year, and well below last quarter's $0.65 per share.
- Net revenue of $4.4 billion, down 14% from last year and 12% below last quarter.
- Operating rates declined significantly, to 65%, from 75% last year and 76% last quarter.
- Scrap prices (Nucor buys a lot of scrap to recycle) fell 19%, a positive since steel prices are down under heavy import pressure.
So Nucor continues to make the best of a bad situation. Let's take a closer look at the key takeaways from the quarter.
Imported steel remains major threat
In the earnings release, Nucor said the decline in steel prices in the quarter was largely due to oversupply from foreign, state-owned steel manufacturing facilities. From the release:
It is estimated that imports accounted for 33% of the finished steel market in the first quarter of 2015. Import levels in February and March were lower than the peak in January, but remain at the exceptionally high levels experienced during most of 2014. We anticipate selling prices to remain under pressure as the flood of imports continues in the second quarter of 2015. Global overcapacity built by foreign, state-owned enterprises continues to be a significant risk factor to our business.
While the U.S. government took some steps in 2014 to level the playing field, it's clear that Nucor and other domestic steelmakers will have to vie with imports for the time being. Fortunately, Nucor can operate profitably even at these challenging levels.
Some positive signs
Scrap steel prices have largely rebounded from the 19% decline in the quarter, but Nucor is still positioned to benefit from that drop by having purchased additional inventory in January and early February. While this is a temporary benefit, it will help absorb some of the impact from lower selling prices, as finished steel prices are down about 5% on average from last quarter, and the year-ago period. This is largely tied to the glut of imported steel in the market, and there's no clear indication when this threat will lessen.
However, demand for steel in nonresidential construction is growing; this segment has been depressed since the 2008-2009 financial crisis and is only beginning to recover. For now, this is simply helping offset the weakness in the energy segment, a result of the collapse in oil prices that has put the brakes on domestic production growth. Actually, the company said one major oversupply area in imports is tube steel to supply oil and gas customers, so this is a double-whammy.
Nucor's $67.8 million quarterly profit is far less than its dividend, which will cost about $131 million in total barring any major increases. However, the company has $1.27 billion in cash and equivalents, so there's essentially no risk of a dividend cut.
Furthermore, the company's free cash flow -- an important measure for a materials company whose generally accepted accounting principles profits can be affected heavily by noncash charges related to market conditions -- is probably a better measure of its dividend safety. Here's a look at both net income and free cash flow per quarter, versus dividends paid per quarter, over the past 10 years:
As you can see, free cash flow and net income have at times fallen below dividends paid in a particular quarter, but the overall profits and free cash flow remain plenty high enough to support the current payout. With that said, I wouldn't count on any big dividend increases until the market is stronger, and last year's small boost is likely to be repeated near the end of this year.
Strong as steel
Nucor remains one of the best-run steelmakers out there, but there's no getting around the cyclical weakness in the market today. Factor in the major threat of imports, which doesn't appear likely to be resolved anytime soon, as well as continued weakness in oil and gas drilling in the U.S., and Nucor has a serious storm to weather in 2015. The good thing is, the company is well positioned to do just that.