A new year, new resolutions and goals, and hopefully a new set of opportunities for investors to take advantage of. The beginning of the year is a time where all investors, no matter what their investing style is, are naturally asking questions like where the best opportunities will be found, and whether existing trends will remain in place or other factors – of an economic, political, or global nature and scope – will force markets to reverse and change direction.
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2020 begins with a lot of these kinds of questions. Will the longest period of U.S. economic expansion, and the bull market that it coincides with, extend even further? Optimism around trade and tariffs between the U.S. and its largest trading partners – not just China, but also Europe, Canada and Mexico – prompted investors to push major U.S. indices to an incredibly impressive single-year performance in 2019. If momentum on that front remains positive, when it’s easy to see why many analysts expect broad growth to continue this year. With a central bank that continues to strike an accommodative tone, and most economic indicators showing signs of ongoing strength, it doesn’t seem like too much of a stretch to be cautiously optimistic about the market’s prospects in 2020.
A big chunk of trade conflict over the last year and a half has involved tariffs on steel and aluminum imports. The passage of the U.S.- Mexico – Canada – Agreement (USMCA) to replace its predecessor, the North American Trade Agreement (NAFTA) improves the prospects of American companies in these industries. That’s part of the reason that stocks like Nucor Corporation (NUE) appear to be in a good position to reverse long-term downward trends. NUE bottomed in August of 2019 at around $46 per share, and has rallied from that point to its current price a little above $55 per share. Despite that nearly 19.5% increase, the stock’s value proposition still appears quite attractive, with strong underlying fundamentals to support the case for an even higher price.
Fundamental and Value Profile
Nucor Corporation (Nucor) manufactures steel and steel products. The Company produces direct reduced iron (DRI) for use in its steel mills. It operates in three segments: steel mills, steel products and raw materials. The steel mills segment produces and distributes sheet steel (hot-rolled, cold-rolled and galvanized), plate steel, structural steel (wide-flange beams, beam blanks, H-piling and sheet piling) and bar steel (blooms, billets, concrete reinforcing bar, merchant bar, wire rod and special bar quality). The steel products segment produces steel joists and joist girders, steel deck, fabricated concrete reinforcing steel and cold finished steel. The raw materials produces DRI; brokers ferrous and nonferrous metals, pig iron, HBI and DRI; supplies ferro-alloys, and processes ferrous and nonferrous scrap metal. It also processes ferrous and nonferrous metals and brokers ferrous and nonferrous metals, pig iron, hot briquetted iron (HBI) and DRI. NUE has a current market cap of $16.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -61%, while sales also declined by almost -19%. In the last quarter, earnings continued to decline -28.5%, while revenues declined -7.3%. I believe these are a reflection of the effect of bearish pressure on steel prices as well as the effect of tariffs. The company’s margin profile is healthy, but does show signs of deterioration; over the last twelve months, Net Income was 7.62% of Revenues but narrowed to 5.03% in the last quarter.
Free Cash Flow: NUE’s Free Cash Flow is healthy, at $1.3 billion. This is a number that has declined from a little more than $1.85 billion in March of last year, but still translates to a healthy Free Cash Flow Yield of 7.65%.
Debt to Equity: NUE has a debt/equity ratio of .39, which is a conservative number. Their balance sheet shows $1.9 billion in cash and liquid assets against $4.3 billion of long-term debt. Their healthy margin profile, along with solid cash position means that they should have no problem servicing their debt right now.
Dividend: NUE pays an annual dividend of $1.60 per share, which translates to a useful dividend yield of about 2.86%. NUE is among a select group of stocks with a long history of stable, and increasing dividend payments.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for NUE is $35.82 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.54. Their historical average is 1.95, which means the stock is undervalued by about 27%, and provides a good reference for the stock’s long-term potential upside, which is at about $70 per share.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the last two years of stock performance for NUE. Since dropping from its high at nearly $70.50 in January of 2018, the stock has followed an extended downward trend to a bottom in late August a little above $46 per share. From that point, NUE staged a solid upward trend, only recently retreating off of short-term resistance at the 50% Fibonacci retracement line around $58 per share. The stock has also recently broken support at around $55.50 marked by the 38.2% retracement level, and could be set to drop to its next support level Immediate support i around $53.50 per share or possibly $52. If the stock can push back above $55.50, it could test $58, or possibly even $61 where the 61.8% retracement line sits.
Near-term Keys: A break above $55.50 could offer a useful signal to buy the stock or work with call options, with an eye on $58 or possibly even $61 if bullish momentum holds. A continued drop in the next day or two could be a signal to consider shorting the stock or working with put options, with an eye on a bearish trade target at around $53.50, or $52. The value proposition for NUE is very interesting, and so if you don’t mind dealing a bit of near-term volatility, there is an interesting opportunity to be had.
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