Nucor (NYSE: NUE) killed it in 2018, shipping a record amount of steel. The giant and diversified U.S. steel maker also posted record revenues and earnings. The company's fourth-quarter 2018 conference call was pretty enjoyable to listen to. While those big headlines are great, however, there's more nuance when you start to look at the details. Here are three key takeaways from Nucor's fourth-quarter conference call that go beyond the record 2018 performance.
1. Good but not great in 2019
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The biggest takeaway from the call is probably the fact that 2018 is likely to be a high-water mark, with 2019 earnings not quite living up to the numbers the company put up last year. That wasn't explicitly stated, but it was strongly hinted at when CFO Jim Frias noted, "We do think that 2019 will be another strong year with earnings performance among the best in Nucor's history."
The devil is in the details of that statement, with the operative word being among. In fact, just recently, Nucor announced that earnings in the first quarter of 2019 would be lower than analysts had been expecting. To be fair, earnings will be higher year over year in the quarter, but they will be sequentially lower than fourth-quarter results. Interestingly, this will be the second consecutive quarter in which the company's results fell short of analyst projections.
So while Nucor isn't exactly falling on hard times, investors shouldn't expect a repeat of 2018's record-setting results as we work through 2019. The steel industry is cyclical, so that's not surprising, but it's definitely something to keep in mind. It is quite possible that 2018 was the top of this cycle.
2. Still investing for the future
The next big takeaway from the fourth-quarter conference call is that Nucor's long-term game plan hasn't changed one bit. The company has always invested in its business via ground-up construction, expansion projects, and, usually during downturns, acquisitions. The goal is to keep the company at the leading edge of the industry in terms of technology, while also expanding into new markets and cementing leadership positions in existing ones. According to the CFO, "For 2019, we estimate capital expenditures of approximately $1.8 billion. That represents a significant increase from 2018 capital spending of approximately $1 billion."
Only 30% of 2019 spending is for maintenance of current assets. The rest is earmarked for expansions, enhancing products, and cutting costs. Although par for the course at Nucor, it really is a big spending jump year over year, as the company puts the record cash it earned last year to work. However, there's a longer-term story here that you need to understand.
During the last industry downturn Nucor spend roughly $9 billion on capital investments. CEO John Ferriola laid out the laundry list of investments during the call, including building a new tubular steel division via a series of three acquisitions during the oil downturn (a key market for tubular steel). All of that spending was designed to "increase the company's peak earnings power," which was on clear display in 2018's record results. Essentially, even if earnings aren't going to be at record levels in 2019, Nucor will continue to make the investments that have allowed it to thrive over the long term.
3. On the supply side of things
The last issue of note from the conference call is less positive. One of the big headwinds in recent years for the U.S. steel industry has been an influx of low-cost steel imports. The industry has been fighting back with trade cases, claiming that foreign competition is dumping steel into the U.S. market at prices below the cost of production. So far, the industry has won a number of key trade cases, leading to import duties on steel from select foreign markets. Those actions, along with the imposition of tariffs under the current president, were a big help last year. According to CEO Ferriola, "Increased demand levels and lower imports generated approximately six million tons of added volume for the U.S. steel industry last year."
That's clearly good news, but you have to step back and couch that information in the broader trend. If you go back to the third-quarter conference call, it was clear that imports were down but remained a significant part of the industry. As Ferriola said at the time: "Through the first nine months of 2018, finished steel imports are down approximately 11%. Finished steel import market share for this year's first nine months is 24%, down from 28% for the comparable year-ago period."
Although Nucor didn't provide an update on those percentages in the fourth quarter, preferring to focus on the positives of a record-setting year, the numbers didn't change materially in a single quarter. There's a notable improvement, but investors have to keep watching imports.
That's doubly true as Nucor and its peers start to invest more in the industry. Indeed, it isn't just Nucor upping its spending on growth projects in the face of strong financial results. In fact, the industrywide pickup in capital spending led analysts to question Nucor about the potential for oversupply in the U.S. market. And that's not even taking into consideration the chance that imports could rise again.
That said, one of Nucor's goals is to be the low-cost supplier. As Ferriola pointed out in the fourth-quarter call, "At the end of the day, the most cost competitive, most efficient, best-operating company will be one that does the best regardless of what happens with capacity coming online. And we think we do pretty well in all of those areas."
However, don't read that to mean that an uptick in supply would have no impact on Nucor. Just that the company would expect to weather the blow better than peers. And don't forget about imports and the impact they can have on the changing supply-and-demand dynamics in the steel industry.
Good news, but just a name to watch
All in all, 2018 was a great year for Nucor. The fourth-quarter conference call was generally filled with pleasing updates, including the company's plans to continue investing for the future. That said, 2019 probably won't be as good a year, and there are still issues to watch, notably including supply-and-demand dynamics that are a positive force today, but have been a huge headwind in recent years. Investors looking for a steel company should have Nucor on their watch list -- but probably hold off for the next cyclical industry downturn before pulling the trigger.
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