Nucor (NUE), a major steel producer, trades modestly higher
today despite the company’s announcement of first quarter guidance that missed expectations
by a good bit. Nucor typically guides for EPS right around this time -- mid-month
during the last month of the quarter. Its rival Steel Dynamics (STLD) also
tends to guide right around this time, so perhaps we'll get guidance from that
company on Monday or Tuesday.
Nucor expects EPS to come in at $1.52-1.57, excluding a $0.07 deferred tax write off. This is below market expectations. On the positive side, it's well above the $1.10 earned in 1Q18. However, it's well below the 4Q18 result of $2.07 that it follows sequentially.
Nucor makes a lot of different types of steel products, the variety of which might surprise those outside the industry. Types of steel produced include sheet (used for automotive products, appliances, HVAC systems), plate (similar to sheet but thicker -- used for agricultural equipment), structurals (construction, rail), and rebar (holds concrete together). Each end market is different and has different market forces. Sheet is Nucor's largest and its flagship product, and as such, investors pay the most attention to this product’s performance.
What is going on in the steel market? Nucor's sequential decline from Q4 is being driven by lower selling prices and margins in its sheet mill group. Additionally, Nucor is experiencing shipment delays to construction customers due to an unusually wet winter season. However, Nucor does believe that sheet pricing reached the low point during Q1, and the company is encouraged by the impact of recent price increases.
So why is the stock not down more considering the size of the EPS miss? Most companies would be selling off more. However, investors have come to understand that the steel industry is perhaps more volatile than other industries like software, which has a high degree of recurring revenue, etc. Steel analysts have come to understand that their models are taking a bit of a stab in the dark. They are not provided with any guidance from the company until very late in the quarter, and some steelmakers do not guide at all.
Also, a lot of volatile factors go into the financial results for steel companies. For example, the cost of scrap steel fluctuates greatly, and it's difficult to predict. Scrap is important because it is the main raw ingredient used to make new steel for mini-mills like Nucor and STLD. There are also other raw materials that vary in cost, and energy costs fluctuate (takes a lot of electricity to run a steel mill).
Plus, the end demand for steel itself fluctuates quite a bit in its own right, adding to the number of moving parts that influence the industry. For example, a wet winter is hurting Nucor's construction market; appliances, meanwhile, are affected by new home sales, and automotive sales fluctuate.
While you never like to see an EPS miss in any industry, steel investors tend to appreciate the impact of all those moving parts and to not reward or punish steel stocks as much as they would in other industries. They understand that the sell side analyst models are more of a best-guess. Also, investors tend to react just as much to the directionality of steel prices rather than hard EPS numbers. Investors tend to forecast the impact a few months out.
With that said, it's good to hear that Nucor thinks Q1 will be the low point for sheet pricing. Sheet pricing is rebounding as recent price increases are taking hold. Nucor is very large and is generally seen as a bellwether for the industry. It impacts expectations for other steelmakers. We suspect STLD will guide early next week, and this NUE guidance may lower expectations a bit. It also provides a sense of what to expect for the integrated steelmakers (AKS, MT, X) when they report Q1 results in April.
- OUR VIEW
- LEARNING CENTER