The steel sector is a function of economic activity and tall operating leverage. Traditional steel is also a capital-intensive sector, given the former one can expect to not pay up for EBITDA. Furthermore, United States steel mills usually have lower cost curves. This is indicative of NUE. Nucor has historically been the producer of low cost with their mini mills and prime acquisition of scrap; this has set them apart from the competition for many years. To that point, NUE has as paid out lots of cash to shareholders via, dividends, special dividends, and buy-backs. Other capital allocation has gone into many acquisitions of smaller firms, or to vertically integrate NUE, so it is run well, no matter the environment.
NUE has been doing the best out of its peers, in terms of price performance, which can be attributed to the above. The environment is not easy however, Chinese froth is difficult to cut through, the economy is stagnant regardless of the zero interest rate policy, and the whole market seems to be gunning for NUE’s margins. NUE is arguably the best-run steel stock.
Jefferies and Bank of America both point out that NUE is the target of short-term traders as a hedge against more aggressive longs. This confirms the quality investment thesis, because NUE has conservative balance sheet, high credit rating, product diversification, and lower implied volatility.
While still on the topic of quality fundamentals leading to outperformance, under the leadership of CEO Dan DiMicco, NUE is up a cool 370% since he took over in September of 2000, while the SPX is unchanged to lower. Dan DiMicco plans to leave NUE at the end of 2012.
Contrary to all of the positives…management and overall executives, own less than 1% of the shares, which is disappointing and not a good indicator. Furthermore NUE has not paid a major special dividend since 2008, the risk is that they continue not generate enough cash in order to be comfortable to do said programs again. A risk to being conservative is being left behind, or the opportunity cost to being more leveraged, however their current position seems to be better than everyone else as of now.
As indicated in the below graph when NUE is compared to the SPX(grey) AKS(blue), X(pink), SLX steel ETF(purple). The chart indicated that NUE(green and red) outperforms their peers, market, and sector ETF. NUE would be up more but dividend returns are not included.
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