U.S. steel giant Nucor Corporation (NYSE: NUE) delivered a pretty positive first-quarter earnings report in late April, though there are still competitive issues with regard to imports. The key takeaway, however, wasn't about the quarter as much as it was about the investments the company has been making for the future. Here are five things that Nucor's management wants investors to know about the first quarter, including the moves it's been making to build a better future for itself and its investors.
1. Imports are an issue, but we're handling it
Nucor CEO John Ferriola summed up the foreign import issue that's been facing the U.S. steel industry and making major headlines this way:
Nucor thrives in a marketplace where winners are determined by real economic advantage, not by artificial and unlawful advantages. Our ability to create value for our customers increases when we are able to compete on a level playing field. For that reason, Nucor applauds the ongoing work of the U.S. government to address the massive volume of dumped and illegally subsidized steel products that have been flooding into our country at historic levels.
According to Ferriola, imports were 27% of supply in 2017, with that figure at 25% for the first quarter of 2018. Leaving aside the trade bluster and provocative headlines, it's pretty clear that the domestic steel industry is still dealing with material import headwinds.
Image source: Getty Images
That said, Nucor's first quarter earnings results were in line with 2017's first quarter aside from a one-time tax charge. Excluding that charge, which is related to the recently enacted tax plan, earnings would have been up around 7% year over year. That's a pretty good showing considering that 2017 was the company's best year since a deep industry downturn started after the 2007-2009 recession.
The takeaway here is that Nucor is doing well despite continued import headwinds. But what management really wanted to discuss was the future.
2. Cash is down, but that's good
At the start of 2017 Nucor had roughly $2 billion in cash on the balance sheet. By December of that year cash was down to $1 billion. At the end of the first quarter that total was down to $760 million. That looks like a troubling trend, but it's not. According to the CEO:
Working capital, in general, for our business always goes up counter cyclically. So, when prices go up for scrap and prices go up for our selling prices, both inventories and receivables build, and we're seeing that right now... So, right now, in an up cycle, working capital is using more cash.
So, far from a warning sign, the company's falling cash balance is an indication that times remain good. In fact, CFO Jim Frias added that:
Earnings in the second quarter of 2018 are expected to increase significantly compared to the first quarter. Orders and backlog are robust throughout Nucor's portfolio of steel and steel products businesses.
In short, a solid first quarter despite continued import headwinds, and clear indications that the second quarter will be good too.
3. Big spending plans
Nucor, meanwhile, is looking beyond the second quarter as it builds for the future. According to the CEO:
The Nucor team continues to develop attractive opportunities for profitable growth. Currently, we are executing seven exciting growth initiatives that total about $1.3 billion in invested capital.
These projects span across multiple lines of the steel maker's business. However all seven are either new mills or expansions/upgrades of existing assets. That means they're all internal growth initiatives. Six of the projects are set to be complete in 2019 and one in 2020. Assuming the U.S. steel market remains strong, the new assets should provide a solid tailwind to results over the next two years.
4. What's the priority right now?
That said, money doesn't grow on trees. CFO Frias, however, wasn't mincing words:
Nucor's capital allocation priorities are clear and they've been consistently practiced over many years. Our first priority is to invest for profitable growth.
Investments like the ones noted above help explain why capital spending was up 140% year over year in the first quarter. For all of 2018 Nucor expects capital spending to be around $1 billion, with just a third of that earmarked for maintenance of existing assets. That's more than double what it spent in 2017.
Since the new plants and expansions won't start coming online until 2019 at the earliest, 2018 will be a big spending year. That's likely to be a bit of headwind for the company's results (notably its cash flow statement) and may require it to tap the debt markets. However, as the CFO noted, the company has a long and successful history of investing this way. So investors should be pleased to see this spending.
5. An example of success to ease your mind
A quick look back at a recent investment success is helpful here. In late 2016 and early 2017 Nucor created a tubular steel business through a series of acquisitions. It was an opportunistic move made while that niche sector was still struggling. In doing so the company added a product line that was higher up on the value chain, and provided another internal customer for the company's more commodity steel products (which the new division uses to make tubular products).
According to CEO Ferriola:
Nucor's sheet mill shipments to this value-added channel to market are expected to grow from 720,000 tons in 2017 to more than 1 million tons in 2018.
That's a nearly 40% increase in just one year in a business line that was built over the last year or so. This is a truly excellent result that will help Nucor sell more high- margin products in 2018. While the success of the current round of investments will be measured differently since they span multiple product lines, seeing Nucor's recent success in the tubular space should provide investors with some amount of comfort that the company will, as CFO Frias stated, "...continue Nucor's long-term history of being effective stewards of our shareholders' valuable capital."
A good read for investors
When all was said and done, Nucor's first quarter was a good one, and it looks like the second quarter will build on that success. And while the steel giant is using more cash than it has in recent years, that's a function of strong industry fundamentals and the investments it is making for the future. Based on its history, notably the recent move to create a new division via a series of acquisitions during the steel industry downturn, investors should be confident that the current spending plans will work out well.
Although Nucor isn't exactly cheap today, it's one of the best run steel companies in the United States, if not the world. If you are considering a steel investment, the company's first quarter results and growth plans deserve a deep dive. It might just be worth paying up for an industry leader that's always building for the future.
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