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On June 18, we downgraded steelmaker Nucor Corporation (NUE - Analyst Report) to Underperform following its lower-than-expected guidance for second-quarter 2013. Our view takes into account weakness in the company’s sheet steel business and a still soft non-residential construction market.

Why the Downgrade?

Nucor, on June 13, issued its guidance for the second quarter which was below expectations. The company expects earnings to be in the range of 25 cents to 30 cents per share, lower than 35 cents per share earned a year ago. Nucor sees sequentially lower performance in its steel mills unit in the quarter with weakness in sheet and structural steel. The company added that non-residential construction markets are still lacking momentum.

Nucor’s first quarter results, reported on April 18, were a mixed bag with adjusted earnings beating the Zacks Consensus Estimate while sales missing the same. Attributable gold production fell 11% in the quarter. Weaker gold and copper pricing affected the results.

Estimates for Nucor are on the downswing following the release of the first quarter results. The Zacks Consensus Estimate for 2013 has gone down roughly 23% to $1.73 per share. The Zacks Consensus Estimate for 2014 has also declined around 5% to $3.42.

Cause for Concern

Nucor has serious issues to contend with. The steel industry is going through a difficult phase and market fundamentals remains challenging in the U.S. There is not enough demand for steel products due to persistent weakness in construction end markets, resulting in excess supply. Contributing toward this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.
 
Nucor, like other steel makers, is plagued by surging domestic steel imports. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices. Moreover, the gloomy conditions in the Eurozone are another area of concern for Nucor since it is the largest market for total U.S. exports. All these factors are hurting Nucor’s profitability.

Steel Stocks That Warrant a Look

While we prefer to stay away from Nucor, other companies in the steel industry with favorable Zacks Rank are Kobe Steel Ltd. , Shiloh Industries Inc. and Angang Steel Company Limited (ANGGY). While both Kobe Steel and Shiloh Industries hold a Zacks Rank #1 (Strong Buy), Angang Steel retains a Zacks Rank #2 (Buy).

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