Nucor Could Build Your Portfolio
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.
- 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.