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Earnings Preview: Nucor Corp.

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Nucor Corporation ((NUE - Free Report) ) will release its results for the third quarter of 2011 before the market opens on October 20, 2011.

Nucor reported a stupendous increase in profit to $299.8 million or 94 cents per share in the second quarter of 2011, surpassing the Zacks Consensus Estimate by 81 cents per share.

In the upcoming quarter, the Zacks Consensus Estimate is pegged at a profit of 51 cents per share, reflecting an annualized growth of 625.71%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in three out of the last four quarters. The average earnings surprise over those four quarters is 25.64%.

Second Quarter Review

Consolidated sales surged 22% to $5.11 billion due to an increase of 21% in average price per ton and a rise of 1% in shipments (to 5.6 million tons) to outside customers. However, results were slightly lower than the Zacks Consensus Estimate of $5.14 billion.

Pre-operating and start-up costs of new facilities were $31.4 million in the second quarter of 2011, compared with $43.4 million in the prior-year quarter. The decrease in costs was driven by the improved performance at the Special Bar Quality (SBQ) mill in Memphis, Tennessee and the wire rod products mill in Kingman, Arizona.

Steel mill shipments grew 6% to 4.8 million tons during the quarter. The average scrap and scrap substitute cost per ton accelerated 19% to $444.

Overall operating rates at steel mills were 71%, flat year over year. Utilization rates were negatively impacted by downtime caused by weather related events and resulting power outages. Total energy cost increased approximately $3 from the prior-year quarter, driven by inefficiencies caused by lower operating rates.

Nucor’s liquidity position remained strong at the end of the quarter. The company had cash and cash equivalents and short-term investments of $2.28 billion as of July 2, 2011. It has an untapped $1.3 billion revolving credit facility that will mature in November 2012. The company’s long-term debt remained unchanged at $4.28 billion as of the above date.

Nucor expects third quarter results to be lower than the second quarter, driven by some market weakness that may impact results. Furthermore, the company continues to see slow but steady improvement in real demand in certain end markets.

Agreement of Estimate Revisions

Out of the ten analysts covering the stock for the third quarter of fiscal 2011, one analyst has made a downward revision in the last 30 days and one made an upward revision in the last 30 days. Similarly, for fiscal year 2011, out of the 13 analysts covering the stock, four analysts made downward revisions in the last 30 days and 2 made upward revisions in the last 30 days. 

Magnitude of Estimate Revisions

The third-quarter 2011 estimate has been flat at 51 cents in the last 7 days and the last 30 days, whereas it stood at 71 cents in the last 60 days. The Zacks Consensus Estimate for the third quarter is 625.71% higher than the year ago quarter.

Our Take

Nucor focused on profitable growth through acquisitions over the past several years. Hence, it continues to seek attractive opportunities to acquire businesses, forge joint ventures and make other investments that are complementary to its existing strengths.

Realizing the anticipated benefits of acquisitions or other transactions will depend on its ability to operate these businesses and integrate them with its operations and cooperate with its strategic partners.

We believe NUE’s strong cash flows and balance sheet will provide flexibility to continue its growth strategy. Long-term contracts, cost reduction efforts and a dominant acquisition strategy could benefit the company in the coming quarters, but the massive industry over-capacity continues to weigh on steel prices.

However, overcapacity in the global steel industry has forced steel manufacturers to export steel and steel products at prices below their cost of production, thereby impacting profitability. Although an improving trend could be observed in automotive steel demand, housing and construction demand remains weak.

The slowdown in steel demand and increased Chinese production are matters of concern. The Chinese steel output has outpaced demand, causing excess supplies and higher inventories. Industry overcapacity and weak demand also weigh on steel prices. Steel producers like Nucor are highly susceptible to volatile steel prices.

Nucor suffers from inflated raw material costs. Lower production rates at the mills have slowed the rate at which they consume the higher cost iron units, particularly pig iron. However, pig iron consumption had increased midway through 2009.

Nucor is facing higher scrap and scrap substitute prices. Scrap and scrap substitutes are the most significant elements considering the total cost of steel production. Nucor believes it will continue to experience volatile raw material costs during 2011, as the end-markets are experiencing some real demand improvement that will continue throughout 2011.

The most challenging markets for its products are associated with residential and non-residential construction.

The company retains a Zacks #3 Rank on its stock, which translates into a short-term “Hold” recommendation.

Major competitors of Nucor Corporation are United States Steel Corporation (X - Free Report) and Commercial Metals Co. (CMC - Free Report) .

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