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A New Look At Nucor
Posted: Sep 09, 2009 11:33 AM by Sham Gad
The steel business has been absolutely hammered by the recession. So goes the fate of steel, goes the fate of the steel companies. With many in the steel business heavily exposed to the spot market, the current recession has not been sparing in its destruction of equity prices.
IN PICTURES: Eight Ways To Survive A Market Downturn
Intelligent Contrarian Thinking
With the steel industry in such dire straits, the contrarian in me is automatically looking for situations with big payoffs. The steel business, if you believe that the industry will eventually turn, offers one such possibility. And mini-mill operator Nucor (NYSE:NUE) may just be the crème de la crème of the industry.
Turning Scrap Into Profits
Nucor, with its mini-mill specialty, focuses on turning scrap metal into finished steel. As you might guess, the low costs of Nucor's inputs - scrap - means Nucor produces higher operating margins and more flexibility in its pricing.
Nucor's highly flexible approach is a very big deal as it allows the company to instantly adjust output to match market conditions.
Nucor's advantages translate into better financials. From 2004 to 2004 its average annual return on equity was 33.6% versus 32.5%, 26.8% and 21.1% for Steel Dynamics (Nasdaq:STLD), Commercial Metals (NYSE:CMC) and Gerdau Ameristeel (NYSE:GNA), respectively.
Nucor's balance sheet is also one of the mightiest. Its 2008 year-end debt to capital ratio was 28%, versus a range of 45% to 62% for the peer names mentioned above. With current steel mill capacity utilization hovering around 40%, down from nearly 90% a year ago, Nucor's operational and financial flexibility is a huge competitive advantage. (To learn more about financial ratios such as these, be sure to check out our Financial Ratios Tutorial.)
The Bottom Line
As the economy eases out of the recession and gets back to showing signs of growth, so will the steel industry. And as the steel industry improves, Nucor's fortunes and profitability will improve dramatically. With Nucor's flexibility in adjusting during the downside, Nucor is a company strong enough to survive nasty economic pullbacks but has the potential for tremendous upside should the economy surprise with a snapback recovery.
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By Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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