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Will Nucor (NUE) Disappoint Earnings Estimates in Q2?

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Nucor Corporation (NUE - Free Report) is set to release second-quarter 2015 results before the opening bell on Jul 23, 2015.

In the last quarter, the steel giant had delivered a positive earnings surprise of 50% despite its revenues and profits being hit by lower pricing. Let’s see how things are shaping up for this announcement.

Factors to Consider

The steel industry is going through a difficult phase and market fundamentals remain challenging in the U.S. There is not enough demand for steel products due to weakness in construction end markets. On the other hand, production ramp-ups by domestic steel producers and rapid growth in Chinese production are contributing to an inventory glut. Moreover, ramp-up of capacity has pressurized the domestic sheet market. The U.S. steel industry’s capacity utilization remains below 80%.

Nucor expects lower profit in second-quarter 2015 as a flood of unfairly traded imports continue to weigh on steel prices. The biggest U.S. steel maker by production capacity also cited challenging conditions in energy markets.Nucor expects earnings for the second quarter to be in the band of 20–25 cents per share, which reflects a decrease from 46 cents a share earned in the year-ago quarter.

Overall operating performance at Nucor’s steel mills segment is anticipated to decline in the second quarter as a drop in average selling prices due to high levels of imports will likely outpace a decline in raw material costs. This is expected to lead to a contraction in margins. Nucor is also seeing weak demand for its products in the energy market.    

Challenging conditions in the Eurozone remains another concern for Nucor since it is the largest market for its exports. Steel imports have resulted in stiff competition in the domestic market and the financial crisis in Europe might lead to the same conditions in the region. In addition, a stronger dollar against the euro will result in increased prices of imports into Europe from the U.S.

Nucor also expects the performance of its raw materials segment in the second quarter to be on par with the previous quarter. The segment is expected to gain from improved performance of the company’s scrap processing businesses. Nucor expects an operating loss of roughly $20 million at Nucor Steel Louisiana in the quarter compared with a loss of around $44 million recorded in the first quarter that includes the impact of higher cost iron ore inventory.

Nucor, however, stated that gradual recovery in non-residential construction markets will lead to improved year-over-year performance in its downstream products segment in the second quarter.

Earnings Whispers

Our proven model does not conclusively show that Nucor is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below:

Zacks ESP: Earnings ESP for Nucor is currently pegged at 0.00%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate both stand at 25 cents.

Zacks Rank: Nucor carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are some companies in the basic materials sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Cliffs Natural Resources Inc. (CLF - Free Report) has an Earnings ESP of +20.00% and a Zacks Rank #2 (Buy).

Agnico Eagle Mines Limited (AEM - Free Report) has an Earnings ESP of +16.67% and a Zacks Rank #3 (Hold).

Royal Gold, Inc. (RGLD - Free Report) has an Earnings ESP of +7.41% and a Zacks Rank #3.

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