First published on Simply Wall St News
Companies like Nucor Corporation (NYSE:NUE) are set to benefit from raising commodity prices, and it seems that investors are starting to notice. Today, we will explore market momentum and see if Nucor’s future performance justifies the price jump.
Nucor Corporation is a steel producer in the U.S., Canada, and Mexico. The company’s stock returned 110% in the last 12 months, and 13.8% in the last 7 days. It seems that the company is gaining the attention of investors who think that commodities will be trading at higher prices in 2022.
The stock is part of this week’s top performers in the materials industry, which you can access HERE, or by clicking on the image below:
As we can see from the list above, raw material companies have been gaining this week, and have a significant track record over the past 12 months. The downside to these companies, is that they are significantly cyclical, which means that their performance will vary based on price and demand. Because they are mostly tied to industries, investors should monitor commodity prices and global industry demand. For example, investors might look at factors such as Annual % Change in Manufacturing, Annual GDP % Change, different commodity prices, etc.
Companies like Nucor have a breakeven point, and are therefore sensitive to changes in commodity prices. While today’s prices may trade at an elevated level, investors need to monitor price developments as a possible drop in the economy may also diminish demand for CapEx projects, which is something these companies rely on.
Next, we will review the fundamentals of Nucor, and see what analysts are expecting to see in the future.
In the last 12 months, Nucor had revenues of US$36b and statutory earnings per share of US$23.16. The bottom line made US$6.8b and free cash flows came a bit lower at US$4.6b.
The high 81% growth in revenues from last year comes mostly from the changing economic conditions, but it’s great to see that even without the current boost in prices and demand, the company managed to stay profitable in the period before 2021.
Looking at the price of the stock, it seems to be trading at a ratio of 6.1x compared to earnings. On an absolute basis, this is low and may indicate a bargain. However, as we mentioned before, Nucor and similar companies are cyclical, and their profits can shift from year to year. Therefore, a more appropriate metric (although not perfect) would be to use 5 year normalized earnings in order to compute a representative P/E. Why 5 years? Because we want to capture the profit capacity of the company pre-pandemic – if this was business as usual, we would consider a 3-year average.
For Nucor, the 5-year average net income is US$ (6,795+0,717+1,264+2,351+1,314)b / 5 = 2.448b
This sets our normalized P/E at 41.3 / 2.448 = 16.87x
While this indicates that the stock is not as cheap as a simple trailing P/E, it is about as expensive as the general US market. This may limit the future upside of the stock, but investors that are convinced that commodity prices will sustain higher levels may opt to see this as a bullish proposition.
Looking at the chart below, we can infer that analysts predict elevated prices to be sustained during 2022 which keeps the company’s fundamental performance up.
Note, that predicting longer than 1 year ahead is hard for commodity-dependent companies, and what we are seeing in the chart after 2022 may reflect that analysts have used mean reversion, or have simply not updated their numbers.
After the latest results, the eleven analysts covering Nucor are now predicting revenues of US$38.4b in 2022. If met, this would reflect a satisfactory 5.3% improvement in sales compared to the last 12 months. Statutory earnings per share are forecast to plunge 23% to US$19.54 in the same period.
Analysts have also reconfirmed their price target of US$121, implying that the uplift in sales is not expected to greatly contribute to Nucor’s valuation in the near term.
The Bottom Line
The company seems to have limited pricing given current conditions and fundamentals. Investors that believe that commodity prices and demand will continue to be elevated, may find Nucor to be an attractive stock.
The company was a high performer this week, and may indicate that more investors are looking at this industry, signaling a rise in momentum. Which may also be good for short term traders.
Investing in a cyclical company needs to be done with care, as the price is very dependent on the interaction between highly unpredictable factors. For example, while commodity prices are expected to increase, some countries, such as China are experiencing an expected drop in GDP growth – additionally, their “0 COVID” policy is slipping which may impact future demand.
Plus, you should also learn about the 2 warning signs we’ve spotted with Nucor (including 1 which can’t be ignored) .
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.