Earnings Preview: Nucor Corp.

Nucor Corporation(NUE - Analyst Report) is scheduled to report its second-quarter 2012 results before the market opens on Thursday, July 19. The Zacks Consensus Estimate for the quarter is 47 cents per share, representing a year-over-year decline of roughly 50%.

Nucor has been struggling due to oversupply in the U.S. steel market and the gloomy European market. Last month, Nucor issued its earnings guidance for the second quarter and expects earnings of 35 to 40 cents per share. The forecast is way behind Nucor’s second-quarter 2011 earnings of 94 cents and also below its previous second-quarter expectations.

The company expected a sequential improvement over its first quarter earnings in the second quarter, but industry pressures and macroeconomic factors forced it to cut its forecast. The projected earnings include one-time adjustments such as an impairment charge of approximately $30 million, or 9 cents per share, and an estimated last in first out (LIFO) credit of $14.5 million (or 3 cents per share).

Previous Quarter Performance

Nucor’s first quarter earnings per share came in at 46 cents, considerably ahead of the Zacks Consensus Estimate of 40 cents. Consolidated net sales increased 5% year over year to $5.07 billion in the quarter. The jump in the top line was driven by a 6% increase in average sales price per ton.

However, the increase in revenue was not enough to meet the Zacks Consensus Estimate of $5.085 billion as a 1% decline in total tons shipped to outside customers weighed on the top line. The average scrap and scrap substitute cost per ton used in the quarter was $445, up 5% year over year.

Agreement of Estimate Revisions

Estimates for Nucor have not moved in the past week, with none of the 13 analysts covering the stock revising their earnings estimates for fiscal 2012. An identical trend is applicable to the estimate for the second quarter, with none of the 12 analysts decreasing or increasing their estimates.

Estimates for 2012 demonstrate a negative bias over the last 30 days with 4 (out of 13) analysts having lowered their forecasts and only 1 going in the opposite direction. For the second quarter, none of the analysts have revised their estimates over the last month.

Magnitude of Estimate Revisions

Estimates for the second quarter and fiscal 2012 haven’t moved at all over the last week. Similarly, the Consensus Estimate for the second quarter has not moved over the last one month. However, the estimate for fiscal 2012 has dropped 10 cents in the last month. The current Zacks Consensus Estimates for the second quarter and 2012 are 47 cents and $1.86, respectively.

Earnings Surprise

Nucor has trumped the Zacks Consensus Estimate over the last four quarters, resulting in an average positive surprise of 17.6%.

Our View

Nucor is witnessing slight improvements in demand in the end-markets such as automotive, heavy equipment, energy and general manufacturing. All three of its construction products businesses, rebar fabrication, joist and decking, and pre-engineered metal buildings were in the black in May, in spite of weakness in the construction market.

However, a sluggish construction market and financial turmoil in the Eurozone represents significant headwinds. Moreover, Chinese steel output has outpaced demand, resulting in an oversupply in the industry and is pressurizing prices in the process.

Also, an increase in imports in the U.S. markets along with production ramp-ups by domestic steel producers have led to an oversupply in the industry, resulting in weak pricing. Hence, even though steel demand might show some improvement, industry oversupply has knocked the wind out of seasonal pricing momentum, which is usually seen in the early part of the year.

We currently have a long-term Neutral recommendation on Nucor. The company, which competes with Commercial Metals Co. (CMC - Snapshot Report) and United States Steel Corp. (X - Analyst Report), maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.