Valuation: Nucor is Speculative and Overvalued

moneyCompany Profile (obtained from Google Finance): Nucor Corporation and its affiliates (Nucor) manufactures steel and steel products. The Company also produces direct reduced iron (DRI) for use in the Company’s steel mills. The Company’s operations include several international trading companies that buy and sell steel and steel products manufactured by the Company and others. In 2012, it recycled approximately 19.2 million tons of scrap steel. In May 2012, ArcelorMittal announced the sale of its steel foundation distribution business in NAFTA, namely Skyline Steel and Astralloy (Skyline Steel) to Nucor. The transaction includes 100% of ArcelorMittal’s interest in Skyline Steel’s operations in the NAFTA countries and the Caribbean.In June 2012, the Company acquired Skyline Steel LLC and its subsidiaries. In August 2012, the Company completed the sale of the assets of their Nucor Wire Products Pennsylvania facility located in New Salem, Pennsylvania, to an affiliate of Wire Mesh Corporation.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0 **Rare Situation. See Conclusion.
MG Opinion Overvalued
Value Based on 3% Growth $22
Value Based on 0% Growth $13
Market Implied Growth Rate 12.36%
Net Current Asset Value (NCAV) -$3.20
PEmg 33.23
Current Ratio 3.24
PB Ratio 2.12

Balance Sheet – 9/30/2013 

Current Assets $6,468,900,000
Current Liabilities $1,993,500,000
Total Debt $4,380,200,000
Total Assets $15,091,800,000
Intangible Assets $2,880,000,000
Total Liabilities $7,486,600,000
Outstanding Shares 318,210,000

Earnings Per Share – Diluted

2013 (estimate) $1.34
2012 $1.86
2011 $2.71
2010 $0.65
2009 -$0.75
2008 $7.01
2007 $4.94
2006 $5.68
2005 $4.13
2004 $3.51
2003 $0.20
2002 $0.52

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $1.52
2012 $1.84
2011 $2.19
2010 $2.46
2009 $3.64
2008 $5.57

Conclusion:

Nucor is a company that needs to stabilize its earnings as soon as possible.  As it stands, the company is not suitable for either the Defensive Investor or the Enterprising Investor primarily because of the instability of the earnings and lack of growth.  From a valuation standpoint, the company presents a situation where any value must come from the balance sheet because the earnings history does not support a positive estimate of growth.  The company’s EPSmg (normalized earnings) have dropped significantly each year over the historical period we’ve reviewed.  Meanwhile, the market is implying the company will grow at over 12%.  Even if you assume the earnings will not drop any further, and will grow at 3% going forward, the valuation would only be $22, well below the market’s current level.  As a result, any value must come from the balance sheet rather than the earnings, and the clearest metric of balance sheet value is the Net Current Asset Value (NCAV).  Unfortunately, Nucor’s NCAV is negative.  Therefore, not only is the company considered speculative based on the failure to meet the Defensive Investor or Enterprising Investor’s requirements, it should be considered speculative from a valuation basis as well.  The fundamentals simply do not support a solid valuation at this time.

What do you think?  Is Nucor overvalued?  Is the company not suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Nucor at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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