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Nucor Feeling Auto Slowdown
Long-term steel contracts, constant cost-reduction efforts, higher steel prices, lower interest rates, strong cash flow position and a dominant acquisition strategy inspire our optimism with respect to the nation’s largest recycler of steel scrap Nucor Corp.’s (NUE - Analyst Report) performance in the coming quarters. However, a slowdown in steel demand from the automobile sector and increased production in China are matters of concern. Thus, we rate the stock a Hold and raise our six-month target price to $55.00.
Nearly 55% of Nucor’s steel sheet volumes are under long-term price contracts, which will provide the company a cushion against higher raw material costs. It had been able to successfully pass on higher raw material costs through a mechanism of steel surcharges, which helped the company maintain or even improve its operating margins. Going forward, we believe long-term price contracts will help Nucor to maintain its near-term profitability.
Nucor’s Castrip technology will structurally lower its cost of production and lead to meaningful long-term savings. This process also reduces the overall environmental impact of producing steel by generating significantly lower emissions.
The company had successfully implemented three raw material projects which are expected to put at Nucor’s disposal over 2.5 million metric tons of high-quality scrap substitutes per year. Recently, Nucor upgraded its furnace at its steel recycling mill in Tuscaloosa, Alabama. Subsequently, production from the plant increased 15%.
In the first quarter, the company commenced operations at the Utah building system facility, which has an annual capacity of 30,000 tons. Nucor increased its presence in the steel mills segment through greenfield projects including special bar quality mill in Memphis, Tennessee, which will have an estimated annual capacity of 850,000 tons.
Read the full analyst report on NUE
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| Market Summary | Jul 31, 2010 13:12 pm ET |
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