Nucor Corp (NUE)
Nucor (NUE) shook up the steel sector Wednesday, guiding earnings to $1.10 - $1.15 for the third quarter. This compares to $1.14 in Q2 and record earnings of $1.70 in the same quarter last year. In the press release, the company cited continuing softness in sheet metal markets and increasing costs of raw-materials. The company also noted that the softness was largely due to a lack of demand in the automotive industry and residential construction. With housing, not only are the structures not being built, but consumers are subsequently not buying washers and dryers, ovens, refrigerators, and other appliances that typically have a high steel content.
Another headwind the company mentioned is that imports from China have been stubbornly high for the first 7 months of the year, and although they have backed off a bit in August, it is still a concern. Strong import numbers from China (or anywhere else) add pressure to steel prices hurting domestic producers who have more competition. As mentioned in my previous Nucor article, this is the inverse of the situation that has driven steel stocks to new highs over the past few years. Now as the demand from China turns into supply, dynamics are shifting to a more difficult environment for domestic producers.
Steel stocks reacted negatively to the news as US Steel (X), Arcelor Mittal (MT), Steel Dynamics (STLD) and Gerdau (GGB) all lost ground on the day. Interestingly, NUE was actually up on the day as analysts from Merril and CSFB (among others) came to the defense of Nucor saying this news was already expected or that it didn’t matter in the long run. Nucor has a stock buyback plan in place and it is likely that the company used extra supply from stock sellers yesterday to purchase a large amount of stock. This will give them a chance to laud their active use of cash to drive investor value when they report Q3 numbers (likely the week of October 15th).
I continue to be short NUE as well as MT and GGB in different accounts I manage. Macro forces still appear to offer little reason to be optimistic, and if analysts for major Wall Street firms begin to pull their support back, there could be additional and possibly severe selling in these names.
FD: Author has short position in NUE, MT, GGB
A couple of things could indicate that even in the face of the China surge, the steel cycle could be turning. First, a number of metal center guys we’ve spoken with have said they plan to stock up inventories because the prices are so cheap. That could indicate a bottom in pricing. Second, despite pressure from Chinese imports, its very hard to predict whether the Chinese economy itself could eat up more steel and alleviate pressure on the U.S. makers. Certainly, if prices tighten at all then no one prefers to buy steel from China. Quality is often suspect and shipping and handling is a real hassle. So you may be right on this but you also could be seeing short when in fact we are approaching a cycle bottom. Demand side, yes, very slow in housing and automotive so that’s a definite negative. But metal centers play a huge role in this whole thing and they are often early actors since they stay away from long-term contracts and hedging. All IMHO
September 15th, 2007 at 1:53 amI have to agree that NUE doesn’t look like it has a great outlook. The technicals of the stock aren’t particularly pretty either, with the stock having larger volume days on the downside than the upside of late.
September 17th, 2007 at 12:57 am