Full Disclosure Finance

By Andrew

I’ve decided to start a new segment of posts on the site called “On the Radar”. When I come across a stock that catches my interest i’ll outline the story in post form so you can see my justification for why I like the stock. This will help me perform thorough research on my stock picks and hopefully give you some ideas in the process. The first stock in the segment is Nucor Corp. (NUE).

Nucor is a steel company operating in the United States with customers across North America. Last year Nucor produced 22 million tons of steel and steel products, including hot-rolled steel, cold-rolled steel, metal buildings and steel joists. It is also North America’s largest recycler of scrap metal. Nucor controls about 20% of the US market and about 60% of sales are to the construction industry with automotive making up another large portion. The U.S. steel stocks have been on fire lately as a decline in finished steel imports to the United States has increased demand for locally manufactured steel. The weak dollar, high shipping rates, and strong overseas demand has kept imports from reaching American shores. This limits the supply locally which forces U.S. steel companies to run at full production capacity and allows them to raise spot prices on steel. As long as demand remains strong these companies should continue to have great pricing power. According to the International Iron and Steel Institute global production remains below historic trends and likely will lag global consumption, despite rapidly rising steel prices.

Nucor is up 20% over the past year but has underperformed compared to competitors U.S. Steel (up 55%) and AK Steel (up 100%). Nucor is only 8 points off its 52 week high and is cheap on a valuation basis trading at 15x trailing earnings and 10.4x forward compared to U.S. Steel at nearly 25x trailing and AK Steel at 18.5x trailing. Nucor recently increased guidance for its second quarter earnings due to strong shipments and higher margins. The company now expects Q2 earnings in the range of $1.75 to $1.80 per share compared to their previous forcast of $1.55 to $1.60 per share and well above consensus analyst estimates of $1.69 per share. That represents an increase of nearly 54% over Q2 2007 on the low end of the estimate. This bullish outlook likely means that analyst estimates for the full year are on the low end meaning Nucor is undervalued and has significant room to the upside. The earnings increase even reflects the dilution of outstanding shares of more than 3% due to Nucor’s common stock offering of 27.7 million shares that closed on May 29th, 2008. On the news shares of NUE jumped nearly 9% to $80.54 but pulled back all the way to $74 and currently sits at $75.50 per share. I’ve been watching this one for a while and I jumped on the opportunity to buy in on the pullback below $75 per share. I expect global demand to remain strong through 2008 and into 2009 and Nucor should perform exceptionally well in this environment.

A key component Nucor’s long term growth strategy includes pursuing strategic acquisitions of downstream steel products. Execution of this strategy has resulted in annual capacity more than doubling over the past year to 4 million tons. Recent acquisitions include Verco in steel decking, Harris Steel Group in rebar fabrication, cold finished bars, & metal grating, LMP Steel in cold finished bars, Magnatrax in metal buildings, and Nelson Wire in wire mesh. Continuing this strategy Nucor announced last week the acquisition of Ambassador Steel, one of the largest independent fabricators and distributors of rebar in the United States. With its strong growth strategy Nucor should continue to increase its footprint in the U.S. steel market.

I think this is a great stock with great potential over the next two years. I think you can get into this one anywhere near $75 per share with a lot of room to the upside.

(Disclosure: Long Nucor)