Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Dow Components to Research – December 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Nucor Corporation (NUE) fares in the ModernGraham valuation model.
Company 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 Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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 = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$25.80|
|Value Based on 0% Growth||$15.12|
|Market Implied Growth Rate||11.20%|
|Net Current Asset Value (NCAV)||-$3.00|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Nucor Corp is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the insufficient earnings growth or stability over the last ten years as well as the high PEmg ratio, while the Enterprising Investor is only concerned by the lack of earnings growth over the last five years. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.12 in 2010 to only an estimated $1.78 for 2014. This level of demonstrated growth does not support the market’s implied estimate of 11.2% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of Nucor Corporation (NUE) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Nucor Corporation (NUE)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Nucor Corporation (NUE) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.