Monday, September 12, 2011

Nucor Could Build Your Portfolio

S&P recently published a report on second quarter 2011 earnings. It found eight companies that reported earnings growth that was higher than 200%. Among those was steel-maker, Nucor (NYSE: NUE), that reported second quarter earnings that rose 224%. That earnings growth was driven a 21% rise in average selling price per ton — although that’s expected to moderate.

Is this spectacular performance enough to make you invest in its stock? Here are three reasons to consider it:
  • Low valuation. Nucor trades at a Price-Earnings-to-Growth ratio of 0.59 -- 1.0 is fair value – a P/E of 22.4 on earnings forecast to grow 38% to $3.68 in 2012.
  • Decent earnings reports. Nucor has been able beat analyst’s expectations fairly consistently and has done so in four of its past five earnings reports.
Two negatives:
  • Increasing sales but plunging profits and more debt-laden balance sheet. Nucor has been increasing sales while profits declined. Its revenue has increased at a 1.7% annual rate from $14.8 billion (2006) to $15.8 billion (2010) while its net income dropped at a 47.8% rate from $1.8 billion (2006) to $134 million (2010) — yielding a very low1% net profit margin. Its debt has been rising faster than its cash. Specifically, its long term debt increased at a 47% annual rate from $922 million (2006) to $4.3 billion (2010) while its cash rose at a 3.3% annual rate from $2.2 billion (2006) to $2.5 billion (2010).
  • Under-earning its cost of capital but getting better. Nucor is earning less than its cost of capital – but it’s getting better. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Nucor's EVA momentum was 5%, based on first six months’ annualized 2010 revenue of $15.7 billion, and EVA that improved from first six months’ 2010 annualized -$2.1 million to first six months’ 2011 annualized -$1.4 million, using a 10% weighted average cost of capital.
The big question for investors is whether Nucor's turnaround in the second quarter will last. Since the company has already warned that price increases might slow down, it would be better to see what happens when it reports third quarter earnings before buying this stock.


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