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Nucor (NUE) Q3 Earnings: Will the Stock Disappoint?

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Nucor Corporation (NUE - Free Report) is gearing up to release its third-quarter 2016 results ahead of the bell on Oct 20.

In the last quarter, the steel giant had delivered a positive earnings surprise of 4.29%. But its revenues fell year over year, trailing expectations.

Nucor has posted positive earnings surprises in three of the trailing four quarters with an average beat of 34.94%. Let’s see how things are shaping up for this announcement.

Factors to Watch For

Nucor provided its outlook for the third quarter last month. Although the company sees higher earnings in the quarter on improved prices and favorable impact from reduced steel imports as a result of trade actions, its guidance for the quarter fell short of expectations. Nucor expects earnings for the third quarter to be in the band of 85 cents to 90 cents per share, an increase from 71 cents earned in the year ago quarter.

Nucor’s third-quarter guidance include an estimated LIFO expense of $21.8 million or 4 cents per share versus an expense of $19 million or 3 cents per share in the second quarter of 2016 and a LIFO credit of $137 million or 27 cents per share in the third quarter of 2015.

While Nucor sees improved performance in its Steel Mills and Raw Materials divisions, it envisions reduced profitability in its Steel Products segment on a sequential comparison basis in the third quarter. Although demand for cold-rolled and galvanized sheet products has been strong, the company said that it is witnessing weak demand for hot-rolled sheet products since the first half of the year.

Nucor is exposed to a number of macroeconomic headwinds. The company is facing soft demand across energy, heavy equipment and agricultural markets. Demand for steel remains subdued in energy markets given depressed oil prices.

Despite some improvements in the recent past, the steel industry is still not out of the woods. The industry is still under relentless pressure caused by years of excess steel-making capacity. Moreover, the U.S. steel industry remains under the risk of cheaper imports despite some recent favorable developments on the import front. Demand for steel products also remains weak due to softness in construction end markets, leading to excess supply, further increased by domestic production ramp ups as well as high Chinese steel production.

NUCOR CORP Price and EPS Surprise

Earnings Whispers

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

Zacks ESP: Nucor has an Earnings ESP -1.11%. This is because the Most Accurate Estimate of 89 cents stands below the Zacks Consensus Estimate of 90 cents.

Zacks Rank: Nucor carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 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 space that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Teck Resources Limited has an Earnings ESP of +10% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Schnitzer Steel Industries, Inc. (SCHN - Free Report) has an Earnings ESP of +16.28% and a Zacks Rank #2.

Carpenter Technology Corp. (CRS - Free Report) has an Earnings ESP of +9.09% and a Zacks Rank #2.

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