Nucor Corporation (NUE) is one of the largest steel producers in the country. In 2008, Nucor produced more than 26 million tons of steel making it the largest manufacturer of steel products in North America. Nucor has made several acquisitions in the past few years, which has greatly expanded company revenue and profit. In 2007, Nucor bought Harris Steel which has allowed it to expand its base into Canada and into steel products used for infrastructure such as bridges and highways.
Nucor is trading at $40 which makes it look like a valuable buy with a large margin of safety. The stock hit a low of $25 in November and has rebounded significantly since then, but it has risen far less than most other competitors, and is trading at less than half its high of $80 reached in mid 2008.
In evaluating a company Benjamin Graham says is important to look at several years of data, and not just base data on TTM. I think this is especially true for the last 12 months which were by no means a normal business period. Earlier this year, Nucor declared its first quarterly loss since 1966. This means the company had not reported a loss in over 42 years. This feat would be phenomenal for a consumer goods company, but for a cyclical company in the steel industry it is abnormal. On the basis of the past five years of earnings, Nucor’s P/E is 10. This is far below the market average, and although for the several past few years many metal companies have traded at low P/Es, in the future the market may pay a higher P/E for metal companies. Even if the P/E ratio stays at the current level of 10, Nucor has a 10% earning yield which is very attractive for such a well run company.
Nucor also is a very shareholder friendly company. The company has paid 145 consecutive dividends. This translates to over 36 years of never missing a dividend. Not only has Nucor never missed a dividend payment, but it has consistently raised it for 35 years until the depression of the steel industry from late 2008 until late 2009. Despite not increasing its dividend over the past several quarters, Nucor to date has not cut its dividend. The company is paying a .35 dividend a quarter which translates to a 3.4% dividend yield. I think this is very impressive for a non cyclical like consumer goods, but for a cyclical like steel it is a phenomenal feat. Nucor until 2009 was also paying out special dividends besides its regular quarterly dividend. This translated into a total of $3.86 worth of dividends in 2007 and increased its stated dividend yield of about 3.2% to about double that number. Nucor has also paid out significant amounts of special dividends in the prior years to 2007.
As Benjamin Graham stated, one reason dividends are so important is that they show a company is acting in the interests of its shareholders and not just its management. This is certainly the case for Nucor. The company can be expected to increase its dividend as the economy and steel industry returns to normal growth. Below is some data comparing Nucor’s dividend to its competitors.
|Dividend Yield – 5 Year Avg.||3.49||2.62||2.51||2.75|
|Dividend 5 Year Growth Rate||57.04||11.79||11.17||9.47|
One reason Nucor is so successful is because it has top notch management. Warren Buffett states that return on equity is a very important measure of a business and it reveals the quality of the management. Nucor’s return on equity over the past five years is 33% which is almost double the industry and sector averages and is over double the S&P 500 average. Nucor also has a much higher return on both assets and investment, which shows that the management is putting its money to good use.
|Return on Assets (TTM)||-1.55||0.02||0.06||3.62|
|Return on Assets – 5 Yr. Avg.||18.65||12.26||10.85||5.24|
|Return on Investment (TTM)||-1.88||0.03||0.05||4.94|
|Return on Investment – 5 Yr. Avg.||22.79||15.73||14.48||6.73|
|Return on Equity (TTM)||-3.18||0.05||0.05||8.71|
|Return on Equity – 5 Yr. Avg.||32.73||18.93||17.49||15.21|
What about its financial condition – is Nucor in good financial shape? The answer again is yes. Martin Whitman, Benjamin Graham and many other great investors were very careful that any company be in top financial shape. Nucor’s quick ratio is close to three and current ratio is almost four. Nucor’s cash and receivables alone is more than its long term debt and the company could pay off about 60% of its total liabilities. Nucor is in good enough financial shape to withstand several years of a possible weak economy and to make acquisitions and increase market share while other heavily indebted steel makers stumble.
Below is some more data about Nucor’s financial condition compared to other companies
|Quick Ratio (MRQ)||2.97||1.20||1.04||0.84|
|Current Ratio (MRQ)||3.96||1.97||1.66||0.99|
But the miracle story of the company is not due to one phenomenal CEO. The previous CEO, Iverson, retired in 1999 after many years of achieving spectacular returns for shareholders. The new CEO Daniel DiMicco, has in the past ten years has achieved even greater success in growing the company into one of the largest steel companies in the world and providing huge returns to shareholders. Clearly Nucor’s success is not just due to one spectacular CEO.
So what makes Nucor so special and why will it continue to be in the future? One reason is the culture the company has created in its workplace. Nucor pays employees large bonuses based on the productivity of their group. Managers are also paid bonuses based on the output of their group. Senior employees also get paid bonuses based on how well the company does. Besides this, Nucor pays out extraordinary bonuses when the company has a strong year. In some years this has worked out to $2,000 dollars per employee and $18,000 per employee in profit sharing. A worker has never been laid off because of a slow economy, and not a single worker has been laid off since the recession began. Nucor does not have perks like executive parking spots. Any special perk like Employee Stock Purchase Plan that is available to management is available to all its employees.
Businessweek wrote an article on Nucor called “The Art Of Motivation“. It describes about how employees went out of their way on a weekend to repair an electric grid that the company relied on. They received no financial compensation for this, yet the company produced record profits for the quarter. The article also states that one reason Nucor is able to make successful acquisitions is because the new employees see how much money they can make if they produce good work working for Nucor and eventually are happy to join the company. This is the culture that has allowed the company to produce phenomenal success that should continue into the future. More information about how the company is successful at motivating its employees can be found on the below link
In conclusion I think Nucor is a great company trading at a very attractive price. You are getting a company with great management that is very shareholder friendly. The company’s salary structure ensures that the workers will be highly productive and continue to achieve great success. Nucor also has a very strong balance sheet and a consistent record of increasing earnings and dividends. A company like Nucor should be trading at a high premium and high P/E, but instead it is trading at a large discount to the S&P 500 average P/E. In addition, you are getting a 3.4% dividend which will likely increase in the future. This all makes Nucor a very attractive stock at its current price.
All charts are Reuters Data.
Disclosure I am long Nucor.