Almost any company can look good during an industry upturn. That is why Warren Buffett's quote, "You never know who's swimming naked until the tide goes out," is both funny and poignant. Very often, it's downturns that show investors which companies are the true industry leaders. Recent downturns in the steel and oil industries were highly informative in this regard, proving once again why U.S. steel giant Nucor Corporation (NYSE: NUE) and oil services company Helmerich & Payne, Inc. (NYSE: HP) are the cream of the crop in their respective industries. And this has nothing to do with the fact that both of these companies have increased dividends annually for more than four decades.
Sometimes simple logic is very powerful. For example, companies that make heavy use of leverage are at a higher risk of financial distress than those that are more prudent with their balance sheets. That's no different than what you have to deal with on a daily basis with your own finances. Too often, however, companies forget this during upturns.
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But Nucor and Helmerich & Payne don't forget. Modest leverage is a core part of each company's business model. For example, Nucor's financial debt to equity ratio is roughly 0.21 today. That's at the low end of the industry, which is exactly where Nucor's ratio here has been for most of the last two decades. Helmerich's financial debt to equity ratio is even lower, at just 0.07. That's not only low for the industry but low on an absolute level. And, like Nucor, Helmerich & Payne has long resided at the low end of its industry on this metric.
The importance of a strong financial foundation can't be overstated, particularly since both the steel and oil drilling industries are cyclical in nature. The lack of leverage allows these companies to not only survive a downturn, but to take the actions needed to thrive when the next upturn eventually arrives.
Investing for the future
For Nucor and Helmerich & Payne, the actions needed usually include spending money. But not just any spending, since many companies spend money to downsize and restructure when times are tough. No, these two industry leaders spend money to grow. The recent downturns in steel and oil illustrate that point.
The most recent steel downturn lasted from 2009 to 2017. However, during that span, Nucor was hard at work expanding facilities, building new steel mills, and buying new assets to broaden its reach into additional higher-margin markets. In total, it spent $8.3 billion dollars during the downturn. A notable example was a trio of acquisitions between late 2016 and early 2017 to create a new division centered around tubular products.
Tubular products are higher-margin offerings that allow Nucor to use its own metal production to move up the value chain -- a key goal for the company. To put some numbers on that, in 2006 Nucor only used 8% of its own steel for higher-margin products. By 2017 that figure was 19%, driven by capital spending during the downturn. With the steel market recovering today, Nucor has focused on internal investments, which shows that it's always looking to improve its business. But the heavy spending during the downturn is what's driving the company's impressive financial results today -- notably accented by Nucor's second-quarter earnings release in which it reported record high earnings.
Success at Helmerich & Payne isn't quite as dramatic today, but is still rather impressive. During the oil downturn, demand for drilling rigs plummeted. Helmerich's active rig count for U.S. land drilling fell from 297 to 87 in just six quarters. The company, however, has long focused on being at the leading edge of drilling technology as a way to differentiate its business. So, during the downturn, it was busy spending money to upgrade its fleet of rigs to so-called super spec status. Super spec rigs are more efficient and can actually "walk" from one drill site to the next.
Approximate Market Share Gains in U.S. Land Drilling
Helmerich & Payne
up about 4 percentage points
Precision Drilling Corporation (NYSE: PDS)
up about 1 percentage point
Patterson-UTI Energy, Inc. (NASDAQ: PTEN)
up about 0.5% percentage point
Nabors Industries Ltd. (NYSE: NBR)
down about 0.5% percentage point
Data source: Helmerich & Payne, Inc.
Earnings are still relatively weak, but Helmerich & Payne is still spending on upgrades, which can cost as much as $8 million per rig (for "walking" upgrades) with a 24 to 30 month payback period. But the benefit of this spending is already showing up. The drilling services company gained just over four percentage points of market share during the downturn, which is more than twice its next closest competitor. Continuing to spend on upgrades during the downturn is what allowed for those gains. And with roughly 230 active rigs today, Helmerich & Payne looks to have much brighter days ahead.
One for now, one for later
With that as a backdrop, you might be wondering if Nucor and Helmerich & Payne are worth buying today. Helmerich & Payne's improving results haven't yet translated into a notably higher stock price. With the stock still more than 40% below its mid-2014 highs and a yield of more than 4.3%, income investors should be looking at this industry leader today. Nucor, on the other hand, has seen a solid price run since the downturn ended. If you are looking for a steel company, it is among the industry's best performers. But if you are looking for a deal don't jump just yet, keep it on your watch list for the next downturn -- when you'll likely be able to buy it at a more compelling price.
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