There was a deep steel industry downturn between 2009 and 2016, but you'd hardly know it from the way Nucor Corporation (NYSE: NUE) invested in its business during that span. The company bought steel industry competitors, built new facilities, inked joint ventures, and upgraded its existing steel mills. The goal was to exit the downturn a better company than it entered it. There's only one way a company can do this -- to build from a rock-solid foundation. Now that the steel industry has started to recover, it's a good time to look at how Nucor got where it is today and what's ahead for the steel company.
Strength in numbers
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One of Nucor's core focuses is maintaining its financial strength throughout the business cycle. Steel is, after all, a cyclical industry that often goes through painful downturns. For Nucor that means maintaining a low level of debt and ample cash to do whatever it needs to do, whenever it needs to do it. That requires balance-sheet stability, and Nucor has worked hard to maintain financial discipline.
The first thing to look at is debt. At the start of 2018 Nucor had $3.2 billion in long-term debt. That's down roughly 13% from the end of 2016 and around 25% lower than the roughly $4.4 billion in debt the company carried between 2013 and 2015.
Although the trend toward lower long-term debt levels is nice to see, a more compelling number is that long-term debt currently makes up around 30% of Nucor's capital structure. That's a reasonable amount of debt for any company, particularly one in a capital intensive industry like steel. Even when long-term debt hit a recent peak in 2013, it only made up around 35% of Nucor's capital structure. Nucor definitely used the strength of its balance sheet to get through the downturn, but even during the worst of it, the company remained financially strong.
For comparison, long-term debt at AK Steel (NYSE: AKS), which has one of the weakest balance sheets in the industry, makes up around 95% of the company's capital structure. And at Steel Dynamics (NASDAQ: STLD), which is among the strongest names in the industry, long-term debt is roughly 40% of the capital structure.
Another key metric to look at is the current ratio, a measure of how easily a company could pay its near-term bills if it were to encounter financial difficulties. Nucor's current ratio is strong at 2.4. That's better than peers AK Steel at 1.8 and iconic United States Steel Corporation (NYSE: X) at 1.75, although it's less than Steel Dynamics and its enviable current ratio of 4.
An even more stringent look at a company's ability to pay its bills is the acid test. The acid test, also known as the quick ratio, considers only assets that can be turned into cash within 90 days. This ratio essentially pulls out inventory that may or may not be worth as much as it's listed for on the balance sheet in a worst case scenario (and could easily take longer than 90 days to get rid of, if it could be sold at all). Nucor's quick ratio is about 1.1, a solid number. U.S. Steel comes in with roughly the same figure, with Steel Dynamics at a much better 2.2 and AK Steel a relatively weak 0.6.
It's worth noting that Steel Dynamics has a material amount of cash on its balance sheet, which helps to offset the risk of its higher debt load relative to Nucor. In addition, Nucor's cash balance dropped in 2017 as it has paid off long term debt over the last couple of years, as highlighted earlier.
Nucor and Steel Dynamics are two of the strongest steel companies financially, and you might think that Steel Dynamics has the edge based on the current ratio and acid test. However, another key question to ask is how well these companies can actually cover the costs of their debt loads. For that you can look at times interest earned, which moves us from the balance sheet to the income statement, comparing a company's interest expenses to its income from operations.
Steel Dynamics' interest earned ratio is impressive at about 8. Nucor, however, comes in with an even better figure of 11. So while Steel Dynamics bests Nucor on some of the key balance sheet ratios, it still doesn't carry its debt quite as well as Nucor. As the chart above shows, AK Steel and U.S. Steel fall well below Nucor and Steel Dynamics on this metric, as you probably expected.
Solid as a rock
Nucor is one of the largest U.S. steel companies and also one of the strongest financially. While it doesn't come out on top on every metric, there's no question that it has the financial strength to thrive even with difficult industry conditions. This strength is a key pillar of the company's approach to business. Although the stock looks fairly expensive today, current shareholders should be pleased to see that management hasn't let the foundation of its success weaken. If you don't own Nucor, it's a good name to keep on your wishlist just in case Mr. Market goes a little crazy and pushes the shares down to attractive levels again. Just make sure to double check the balance sheet before you pull the trigger...
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