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Bull of the Day

The construction sector is currently expected to see year over year earnings growth of +8.9% in the second quarter of 2016.  This expectation was further bolstered with the recent US construction report that stated overall growth is expected to average +6% annually into 2020 with expenditures totaling $1.5 trillion.  Specifically, the nonresidential building segment is expected to see annual growth of +7.7%, and spending on nonresidential building construction is expected to rise an average +4.9% per year through 2020. One company that is highly leveraged to the nonresidential construction market, Nucor Corp (NUE - Analyst Report) , is our Zacks Bull of the Day.

This Zacks Ranked #1 (Strong Buy) company manufactures and sells steel products. Principal steel products are hot-rolled steel (angles, rounds, flats, channels, sheet, wide-flange beams, pilings, billets, blooms and beam blanks), cold-rolled steel, cold finished steel, steel joists and joist girders, steel deck, steel fasteners and steel grinding balls. Nucor is the largest recycler in the United States. Nucor and affiliates are manufacturers of steel products, with operating facilities in fourteen states.

Earnings and Increased Second Quarter Guidance

Management reported Q1 16 earnings in late April where they beat the Zacks consensus revenue estimate, but came in below the Zacks consensus earnings estimate.   The company saw year over year gains in net earnings +4.4%, total tons shipped +9%, total steel mill shipments +16%, overall operating rates at the steel mills +74%, and total steel mill energy costs declined $7 per ton compared to the year ago quarter.

Then in mid-June management announced guidance for Q2 16 earnings; they expect earnings to be in a range of $0.65 to $0.70 per diluted share compared to Q2 15 earnings of $0.39 per diluted share.  Management expects to see improvements in the steel mill segment and their downstream products segment.

Management’s View

According to management, “We expect earnings in the second quarter of 2016 to be significantly improved from the first quarter of 2016. Performance of the steel mills segment is expected to improve in the second quarter of 2016 as compared to the first quarter of 2016 as recently announced price increases for many of our products are being accepted in the market. This improved performance by the steel mills segment in the second quarter of 2016 will be tempered by rising scrap prices.  We expect increased profitability for our downstream products segment in the second quarter of 2016 as compared to the first quarter of 2016 due to seasonal factors as improving weather conditions benefit nonresidential construction markets. The performance of the raw materials segment is expected to improve in the second quarter of 2016 as compared to the first quarter of 2016 due to improved pricing at both our scrap processing businesses and DRI facilities.”

Performance vs. S&P 500

As you can see in the graph below, NUE has been outperforming the S&P 500 for the past 5 months.

Increasing Guidance

Due to management’s new guidance for Q2 16, and their positive outlook past Q2, consensus earnings estimates for Q2 16, Q3 16, FY 16 and FY 17 have all risen in the past 30 days.  Q2 16 rose from $0.57 to $0.70, Q3 16 improved from $0.76 to $0.86, FY 16 jumped up from $2.04 to $2.49, and FY 17 moved up from $2.89 to $2.97.

Bottom Line

As investments in nonresidential construction improves the need for Nucor’s steel products will continue to be in high demand out through 2020.    This consistent demand coupled with management’s focus on operations (improvement in steel mill and downstream products segments), and expense cutting (estimated LIFO expenses are expected to decline by $8.5 million between Q1 16, and Q2 16) have this steel company rolling through 2016.

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