By Yaser Anwar, CSC of Equity Investment Ideas
NUE announced that 4th Q EPS will be $1.05 to $1.15, which was below consensus of $1.44, due to issues such as lower prices and volumes. NUE expects 4th Q earnings to be the weakest this year, as high inventories and record imports are starting to flow through operating results in the form of lower pricing and weaker shipments (NUE expects a 12%-15% sequential decline in Q4 shipments).
Additionally, NUE margins have been compressed by scrap prices not falling as much as anticipated. NUE did indicate it expects inventories to return to desired levels by Q1 07, but this is entirely dependent on a “significant” reduction of import volumes from current levels, particularly from China.
NUE’s average sheet price was $673/ton while the average trade reported HRC price (spot midwest) was $622/ton in 3Q. DB has modeled an average HRC spot price of $594/ton in 4Q. With current spot prices $30+/ton below this figures, DB’s pricing assumption is too high.
A $20/ton change on NUE’s sheet volume equals a $40MM negative in 4Q. Volumes – the bigger issue NUE pointed to volume declines of 12% to 15% QoQ. This translates to a decline of as much as 870K tons. Whereas DB had previously estimated outages of 350K tons.
With today’s guidance announcement from NUE, it is now clear that the three major domestic steelmakers; NUE, Mittal Steel and US Steel are determined to correct the current inventory overhang with production discipline. NUE’s guidance tells me that that domestic steelmakers might be forced to cut production and shipments further than many anticipated to combat high import volumes and a pesky inventory build.
Spot sellers are more exposed to weakness. NUE emphasized that “trough” 4th Q earnings are well above 3Q05 “trough” of $0.93. Unclear if suggesting that 1Q07 will be better but pricing remains a risk. NUE also noted that inventory correction is “delayed” and will last through 1Q07 assuming imports decline.
Investors should understand that the risk is to the downside in the near-term particularly given that Nucor is a large spot seller. Longer-term, NUE seems a solid growth story with an attractive FCF yield and buyback potential.
So what does The Street think?
According to JPM-
Remain OW––share price weakness could be opportunity to add exposure We believe that NUE is trading at attractive multiples, particularly considering its diversified revenue streams, its industry-leading position and strong cash flow potential.
We estimate that NUE trades at a 2006E EV/EBITDA multiple of 5.4x and at a P/E of 10.9x and at a 2007E EV/EBITDA multiple of 5.9x and at a P/E of 11.9x. Moreover, based on our revised estimates, NUE is trading at a FCF yield of 12% in 2006 and 9% in 2007.
According to DB-
NUE is trading at 13x and 6x our ’07 EPS and EBITDA estimates. Target price goes to $56 (from $50) which now represents 1.1x our NAV (9% WACC using a 1.5 beta on NUE capital structure) & put its valuation in-line with valuation premiums in the industry.
According to CSFB-
NUE’s news is consistent with our cautious view towards the steels, driven by the magnitude of both the inventory and import increases throughout 2006 coupled with the recent softening in demand, which we believe sets the stage for a prolonged destocking period extending at least through 1H’07, which in turn would materially impact the 2007 EPS/EBITDA forecasts. As such, we continue to avoid US steel equities in general, and NUE in particular.
According to Yaser-
NUE’s earnings are exposed to cyclical markets such as non-residential construction, the company has a solid share of the markets in which it competes and generates what I view as substantial free cash flow. With the global steel industry becoming more consolidated via mergers, the increased concentration of production among fewer companies should result in greater pricing discipline,
What say you? Feel free to comment.
P.S. Thanks to reader CB for suggesting this analysis- If you’ve got a stock you want me to analyze feel free to comment or email me. My only stipulation is it has to be at least 100 mill in revenues and US based. Merci Beaucoup.
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