Capital Reinvestment And New Facilities Will Transform Steel Operations

Key Takeaways

• Strategic investments in new projects and facilities may enhance operational capacity and diversify earnings, driven by rising steel demand.
  
• Policy changes like Section 232 tariffs could reduce import competition, supporting domestic sales growth and improved margins.
  
• Economic uncertainty and project execution risks could impact Nucor's revenue and margins, while management changes and policy shifts might affect operations and costs.

Catalysts

Engages in the manufacture and sale of steel and steel products.

• Nucor's significant capital reinvestment of $860 million, with two-thirds directed towards projects commencing operations within two years, is expected to diversify and strengthen future earnings. This impacts revenue and net margins through enhanced production capacity and efficiencies.
  
• The completion of new production facilities, including rebar micro mills and coating complexes, is anticipated to boost Nucor's operational capacity and potentially increase revenue due to higher product output and variety.
  
• Nucor's expansion into advanced product grades and new markets, such as the advanced manufacturing facilities and infrastructure projects, may facilitate revenue growth due to rising steel demand from these sectors.
  
• Trade policy improvements, like the reinstatement and broadening of Section 232 steel tariffs, could level the playing field for Nucor, potentially reducing import competition and supporting higher domestic sales and net margins.
  
• Improved backlogs in steel mills, which are up over 30%, suggest strong future demand that could translate to increased revenue through sustained order flow and pricing stability.

Nucor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nucor's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $12.99) by about May 2028, up from $1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 20.3x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 2.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Nucor Future Earnings Per Share Growth

Risks

• Macro-economic uncertainty and volatility could negatively impact steel demand, which would in turn affect Nucor's revenue.
  
• Execution risk associated with new projects coming online, such as the West Virginia sheet mill, could result in operational challenges and impact earnings.
  
• Retirements of key executives and potential transitions may affect management execution and strategic continuity, potentially impacting operational efficiency and net margins.
  
• Changes in trade policy, while intended to help domestic producers, could lead to retaliation or affect Nucor's access to certain raw materials, impacting costs and net margins.
  
• Volatility in raw material prices, particularly scrap and DRI, could increase operating expenses and pressure margins.

Valuation

• The analysts have a consensus price target of $146.319 for Nucor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $175.0, and the most bearish reporting a price target of just $120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $36.1 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $116.85, the analyst price target of $146.32 is 20.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.