Nucor Poised On Auto Strength, Improved Prices Amid Risks

On Sep 6, we issued an updated research report on steel giant Nucor Corporation (NYSE:NUE) .

Nucor saw its profits rise in second-quarter 2016, aided by its cost management initiatives. The company provided an upbeat guidance for the third quarter. Nucor sees higher profits in the quarter on a sequential comparison basis on the back of improved prices.

While most of the earnings improvement is expected to be witnessed in the Steel Mills segment on improved pricing at sheet mills, performance across Raw Materials and Downstream Products divisions is also expected improve in the quarter. The company sees better performance in its direct reduced iron (DRI) facilities that are expected to benefit from improved iron units pricing and lower iron ore costs.

Steel market conditions have improved lately, driven by favorable developments on steel trade cases in the recent past, providing some respite to U.S. steel producers. Steel prices recovered during the second quarter, helped by punitive trade actions that led to levy of tariffs on imports. Nucor should gain from improved prices and favorable impact from reduced steel imports as a result of these actions.

Nucor should also benefit from continued strength in the automotive market. Demand from this key end-market (especially for the company’s sheet steel products) remains healthy. The company remains focused on achieving greater penetration of this major market in 2016. Nucor has also entered into a joint venture with JFE Steel Corporation of Japan to build and operate a plant in Mexico that will supply sheet steel to the country’s growing automotive market.

Nucor also remains committed to expand its production capabilities, improve its cost structure and grow its business through strategic acquisitions. The acquisition of Gallatin Steel Company has reinforced Nucor’s foothold in the key Midwest market (the biggest flat-rolled consuming region in the U.S) and allowed it to better serve its flat-rolled customers in the growing pipe and tube segment.

Moreover, sheet piling production capabilities expanded at Nucor-Yamato structural steel following the completion of a roughly $115 million expansion project. The Nucor-Yamato joint venture is expected to continue to grow its share in the steel pilings market over the next few years. The joint venture remains focused on broadening its value-added offerings.

However, 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 favorable developments on the import front in the recent past.

Unfairly-traded, subsidized imports are still flowing into the American market due to foreign producers' overcapacity. China, which accounts for around half of global steel output, continues to pose a threat to the U.S. steel industry. China's steel industry continues to reel under massive excess steel capacity and depressed domestic demand amid a sluggish economy.

Moreover, Nucor is still seeing weak demand across energy, heavy equipment and agricultural markets. Demand for steel is expected to remain subdued in energy markets in the near term given depressed oil prices.

Nucor is a Zacks Rank #3 (Hold).

NUCOR CORP Price

Stocks to Consider

Better-ranked stocks in the steel space include ArcelorMittal (NYSE:MT) , Gerdau S.A. (NYSE:GGB) and Ternium S.A. (NYSE:TX) . While ArcelorMittal sports a Zacks Rank #1 (Strong Buy), Gerdau and Ternium carry a Zacks Rank #2 (Buy).

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