Nucor Corporation (NYSE: NUE) is a large U.S. steel company, but it has long gone about its business in a different way than most of its peers. On the surface, that means a focus on electric arc mini-mills, but there's so much more to understand about the company beyond that. Here's why Nucor is the best steel company in the industry today, why it should remain a top producer, and, ultimately, why it should be on your wish list.
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One of the distinguishing features of Nucor's business is its use of electric arc mini-mills. These facilities are more flexible than the blast furnaces that underpin competitors like AK Steel (NYSE: AKS). Blast furnaces need to run at high utilization rates to turn a profit, while electric arc mills are, to simplify a bit, easier to turn on and off as demand merits.
But that's only one piece of the cost puzzle. Nucor's mills also make heavy use of scrap metal, which Nucor gets from its own scrap yards. It's also been building direct reduced iron ore facilities, which give it another source of metal that it can use to make steel. Prices for the company's key inputs go up and down, and there's nothing it can do about that; however, Nucor has created a vertically integrated model that gives it more control of these costs than many peers have.
And then there are employee costs. Nucor has a unique pay structure that's built around a profit-sharing system. Its workers are rewarded well during the good times but are asked to share in the pain during lean periods. This helps protect Nucor's margins right when it most needs them protected. All in, Nucor has built a business that benefits from low costs and that's not likely to change anytime soon.
Growing from a solid foundation
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The next distinguishing feature is Nucor's balance sheet. Long-term debt makes up around 30% of the steel giant's capital structure, a modest sum for a capital-intensive business like making steel. Compare that to AK Steel, where shareholder equity is negative (excluding non-controlling interests), leading to long-term debt making up more than 100% of the capital structure. Nucor's current ratio, meanwhile, is around 2, meaning it can pay its near-term bills twice over.
So Nucor is clearly focused on having a conservative balance sheet. But it also uses that balance sheet when appropriate to expand the business. For example, management just announced plans to build a new steel bar mill and bought two mills, one in Mexico and one in Missouri. But that's just the last few months -- Nucor is always looking for expansion opportunities. This is particularly true during industry downturns, when it can get good prices.
Management wants to own assets that differentiate it from competitors. A key focus is on moving up the value chain by expanding its position in value-added steel products. This allows it to charge more for the steel it produces, but also helps to protect it from low-cost foreign imports that compete in the commodity steel space.
A great company
When you step back and look at the full picture, Nucor is a great steel company. It is well positioned today and has all of the pieces in place to remain well positioned in the future. The only problem is price. Nucor is far from cheap -- price to book value, price to sales, and price to cash flow are all above the company's five-year average. The yield, meanwhile, is relatively low. This isn't a stock I would buy today, but it is one that I would put on my wish list.
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